When Wash Sales Are Not Wash Sales
I have received more questions on this topic than all other topics combined:
"I have all these wash sales reported on my 1099-B, what can I do?"
If they are truly wash sales, there is nothing you can do but report them, pay the tax, then revise your trading style or elect mark to market ... but not until your capital loss carryover is substantially reduced.
This has occurred a LOT in the past few Covid years when employees were working from home and they decided to supplement their "income" by day trading. Unfortunately, most people incurred losses but when they received the Form 1099-B from their broker, there were all these mysterious entries called "Wash sale loss" adjustments that turned their losses into gains or small gains into much larger gains.
To further exacerbate the problem, they actually did incur cash losses but they could not be deducted, hence, no cash to pay the tax ... a bad situation indeed.
The other questions I have received are:
> Are these "wash sale losses" gone forever?
> How do I recognize the loss when the 30-day forward window has expired?
But, what if these reported wash sales are not really wash sales? That is what we will explore on this page.
We will take a look at some actual Form 1099-B entries, the exact types of entries that may be on your Form 1099-B, that report HUGE wash sale losses, and show how those are really not wash sale losses.
This is a portion of an actual Form 1099-B for two Amazon trades:
These wash sales were included in the total wash sales reported on page 1 of Form 1099-B:
The "Net gain or loss" is computed as follows:
Proceeds less Cost basis plus Market discount/Wash sale loss disallowed = Net gain or loss.
Thus: 6,054,157.22 - 5,982,732.67 + 253,956.61 = 325,381.16 as reflected on Form 1099-B
So, one would think that without the wash sale adjustment, the net gain would fall to 71,424.55, a much more palatable gain.
Thus, it would appear that the AMZN wash sale would be included in the "Wash sale loss disallowed" amount on page 1 ... and it is, but what impact does it have?
Let's now take a look at the RAW TRADES (trades as executed) from this broker:
What is reflected above is NOT an electronic Form 1099-B (Form 1099-B in Excel format) but a download of the ACTUAL RAW TRADES made by the trader.
As you can see, wash sales are reported on Form 1099-B but have NO IMPACT on the Net gain or loss amount because the sum of the Proceeds (the positive amounts) and the Cost basis (the negative amounts) are exactly the same as the Net gain or loss reported on Form 1099-B.
This can be reconciled by taking the Security totals of the individual trades using the wash sale formula as described above. However, attempting to match each individual Form 1099-B line item to the RAW TRADES may be a fruitless task.
So how does this occur?
Brokers are required to report wash sales so that taxpayers can report wash sales on their tax returns.
As an aside to this discussion, if you are preparing your own Schedule D and Form 8949, you only need to put the market discount/wash sale transactions on Form 8949 and all others would go directly on Schedule D lines 1 or 8. So if you have only a few wash sales, just place them on Form 8949 and calculate the net amount that would appear on lines 1 or 8 of Schedule D, a much less daunting task.
It is my presumption that brokers report wash sales, even when no wash sales exist, based on the execution date/time the closing transaction (the transaction that created a loss) was filled. If there were multiple fills, then there is the possibility of a wash sale if even one contract or share is closed at a loss.
Does this make sense ... No?
It would be much more helpful if the opening and closing transaction, if completed on the same day, were not reported as a wash sale.
As you can see in the above RAW TRADE ledger, the opening trades (either BTO or STO) were executed on the same day as well as all the closing transactions (BTC or STC). In my opinion, no wash sale should be reported since all the Opens were on one day and all the Closes on another day.
Here is another example using TSLA:
You can see that the reported Loss on Form 1099-B equals the sum of the Proceeds and the Cost basis from the RAW TRADE ledger.
Conclusion
Four non-wash sale transactions have accounted for 186,146.59 of the 253,956.61 total wash sales, just over 73%. AND THEY ARE NOT WASH SALES!!
How can you determine if this is the case?
You need to download the RAW TRADES from your broker, which may be an ordeal for some of the online-only brokers where you trade only from your smartphone. You may need to contact Customer Service.
You should remove any ancillary data, such as, money movements, interest income or margin interest charged, dividends and the like so that only the trades are used.
Then sort the trades by ticker symbol then by date. Search for the transaction reported as a wash sale and then determine if it is truly a wash sale.
It should be apparent that the answer to the questions posed at the top of this page:
> Are these "wash sale losses" gone forever?
> How do I recognize the loss when the 30-day forward window has expired?
are less troublesome now as the answers are illustrated in the examples above:
> No, the wash sales are not gone forever, and
> They are recognized automatically after 30 days have passed since the loss sale.
Which Wash Sales are Correct?
Wash sales that are probably actual wash sales are those where:
> The trade occurred typically in December
> There are open positions at year-end
Reporting
So, if you are preparing your own Form 8949, do you report the wash sales that are not wash sales? Good question.
If you do report them you will need to place an adjustment code on the Form 8949, presumably code "B" adjusting the basis to the correct net gain or loss. Sometimes code "W" will accomplish the same purpose depending on if you report from what is on Form 1099-B or your raw trades.
If you choose not to report it, you will probably be OK from an IRS perspective since you can show mathematically that there is no wash sale, but you may receive a letter from IRS to which you will need to respond.