You sell or trade stock, mutual fund shares, or bonds at a loss.
Within 30 days before or after the sale date, you:
Buy substantially identical stock or shares
Acquire substantially identical stock or securities in a fully taxable trade
Acquire a contract or option to buy substantially identical stock or securities
Acquire substantially identical stock for a traditional or Roth IRA
If a wash sale occurs, you can’t deduct the loss on your return. However, gain on a wash sale is taxable.
The wash-sale rules are designed to prevent people from selling investments and then buying the same stock back for the sole purpose of:
Creating a deductible loss
Using the loss to offset other shares sold for a gain
You can't sell a stock or mutual fund at a loss and then repurchase it within 30 days with the sole purpose to claim the losses. Ex: If you sell shares of a mutual fund in which you reinvest the dividends, you could have a wash sale. This might apply to mutual funds or stocks that pay monthly dividends.
When calculating basis for shares sold in a wash sale, add the amount of disallowed loss to the basis of the shares that caused the wash sale -- the new shares you acquired. By doing this, you defer the loss, but it’s not totally disallowed.
Ex: Lissa purchased 100 shares of company stock on May 9, 2006. On June 7, 2012, she sold the stock for a loss of $500. On June 17, 2012, she purchased another 150 shares of the same company's stock for $6,000 at $4 a share. Since 100 of the shares she purchased were identical to 100 of the shares she sold, she can't deduct the $500 loss.
However, Lissa can add the loss ($500) to the basis of the 100 new shares ($4,000) that she purchased. So, 100 of the new shares now have a basis of $4,500 and the remaining 50 shares have a basis of $2,000. The holding period of the 100 shares begins on May 9, 2006 -- the date she bought the original shares. The holding period of the remaining shares begins on June 17, 2012.
You also have a wash sale if both of these apply:
You sell stock at a loss.
Your spouse -- or a corporation you control -- buys the same stock within the 30 days before and after the date of the sale.
Also, if you bought fewer shares of stock or securities than you sold, then only the number of shares you purchased is subject to the wash-sale rules.
Ex: Andy bought 100 shares of company stock on Oct. 25, 2008, for $4,000. He also purchased 75 shares of the same company's stock on Jan. 20, 2012, for $1,500. On Feb. 11, 2012, he sold the 100 shares he purchased in October 2008 for $3,000, and realized a $1,000 loss on the sale.
Since he purchased only 75 shares of the same stock within the 30-day period prior to the sale, he can't deduct the loss on 75 shares of the stock he sold. However, he can deduct the loss for the other 25 shares he sold (25 / 100 = 1 / 4). So, he can report a loss of $250 on his return:
$1,000 (loss) / 4 = $250
Also, he can increase his basis in the new shares by 3 / 4 (75 / 100), or $750:
$250 (1 / 4 of the loss) x 3 = $750
So, the basis of the stock he purchased in January 2008 is now $2,250:
$1,500 (purchase price of new shares) + $750 (amount of unallowed loss) = $2,250
Report wash sales on Schedule D. Enter the full amount of the loss in Column f on either line 1 or line 8. On the next line, enter "Wash Sale" in Column a. Then, enter the amount of the disallowed loss as a positive amount in Column f. For shares you sold that aren’t subject to the wash sale rules, report that sale as usual.
To learn more on identical stocks and securities, see IRS Publication 550: Investment Income and Expenses.