Does selling shares within 30 days of purchase count as a wash sale?

Question

Quoting IRS publication 550,

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

1. Buy substantially identical stock or securities,
2. Acquire substantially identical stock or securities in a fully taxable trade,
3. Acquire a contract or option to buy substantially identical stock or securities, or
4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

Suppose I buy 100 shares of a stock on July 1, and two weeks later, on July 15, sell those shares at a price lower than I paid for them. I have sold stock at a loss, and I have not made any purchase of replacement shares - I own 0 shares at the end. However, the purchase through which I acquired the sold shares falls within 30 days before the sale. This purchase is a purchase of shares identical to those I sold, because those shares are the shares I sold.

Does the purchase through which I acquired the shares I sold count as buying "substantially identical stock or securities" within 30 days before the sale, thus disallowing the loss? I feel like it shouldn't, but laws can get really weird. Citations would be appreciated, the more explicit the better.

Answer 1

Addition: With this edit, I add a citation from a well known and highly respected source, instead of merely quoting my experience with the IRS.

As the OP described his purchase, and the sale 15 days later, he has a short term loss. He can deduct this loss, first from any short term gains he has in the same year (or that have been carried forward); second (if there is any loss left) from any long term gains he has in the same year (or that have been carried forward); and third (if there is any loss left) take a $3,000 adjustment on his ordinary income. (An adjustment is like a deduction, but better, because it reduces your Adjusted Gross Income.) If there is still any loss left over, he can carry it forward to the next year.

Wash Sale Citation: From J.K.Lasser. Your Income Tax 2018 (typed from hard copy), page 558:

Loss on the sale of part of a stock lot bought less than 30 days ago: If you buy stock and then, within 30 days, sell some of those shares, a loss on the sale is deductible; the wash sale disallowance rule does not apply.

....the wash sale rule does not apply to a loss sustained in a bone fide sale made to reduce your market position.

(Obviously if, within 30 days, you then buy essentially what you originally bought and then sold, your loss is denied.)

Googling indicates the new tax law did not change the rules on wash sales, but I do not have a copy of this year's J.K.Lasser.

Other references, for example A Primer on Wash Sales by Charles Schwab support Lasser's explanation. So even if the transaction the OP describes is technically a wash sale, it has no consequences, other than that of a short-term capital loss.

PS: Don't get hung up on the phrase "part of a stock" in the Lasser quote. It is there to make a more general case. The Lasser quote applies to buy, then sell, all of the stock, too.

You don't need to consult a lawyer. You made no second purchase within 30 days of the sale, before or after. You might want to purchase a tax guide, such as J. K. Lasser, however.

Afterthought: Is there a loophole here? Will ask in a separate Q.

Answer 2

Does the purchase through which I acquired the shares I sold count as buying "substantially identical stock or securities" within 30 days before the sale, thus disallowing the loss? I feel like it shouldn't, but laws can get really weird. Citations would be appreciated, the more explicit the better.

Yes, it counts as a wash sale but no, it doesn't disallow the loss. 26 USC 1091(a) is umambiguous -- this is a wash sale.

But the law allows regulations to specify what happens to the disallowed loss but requires that the regulations shift that loss to an increase in basis to some unit of stock or securities. In this case, there is no place to shift the loss, so the only thing that can possibly happen is the basis stays with that sale.

If you did possess any other substantially identical stock or securities, you would have to consult the detailed regulations to see where the loss appears as an increase in basis.

See 26 USC 1091(c) and 26 USC 1091(d).

Answer 3

This would appear to depend on ones interpretation of 26 U.S. Code § 1091 (a).

In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under section 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business. For purposes of this section, the term “stock or securities” shall, except as provided in regulations, include contracts or options to acquire or sell stock or securities.

This would indeed be a wash sale if this statute considers a stock or security to be "substantially identical" to itself. However it is not clear to me if this is so or not as parsing it as layman it isn't clear if an object can be called "substantially identical" to itself.

I suppose if you want a rock solid interpretation of this law you would be better of speaking to a lawyer or judge than people on the internet.

Answer 4

Agreeing with @DavidSchwartz, it is a wash sale, but you can still realize the loss immediately. Remember a wash sale just delays realizing the loss, it doesn't negate it completely (unless a tax-advantaged account is involved). But if there are no replacement shares left to adjust the basis for, the loss can be realized immediately.

Fairmark has extensive information on this topic. Their first example addresses this situation:

1: Selling All

On June 1 you buy 200 shares of XYZ for $10,000. On June 12 you sell all 200 shares for $8,000 (a loss of $2,000).

Most people wouldn’t even think about applying the wash sale rule here. You know instinctively it shouldn’t apply, even though there’s a purchase of identical stock less than 31 days before the sale. Your instincts are correct: the wash sale rule doesn’t apply because the stock you bought isn’t replacement stock for the stock you sold. That’s true because you sold the same stock you bought.

Answer 5

I'm editing this answer because the OP edited the original question, clarifying his premise. If you buy substantially identical identical stock or securities" within 30 days before or after realizing a lose, the loss is disallowed. Note that disallowed means that the loss is deferred. It does not mean that it is disallowed and lost forever. This involves 3 transactions if long (two buys and a sell).

The OP has changed his wording to clarify that he meant one buy and a sale within 30 says of his purchase. Although David Schwartz insists that this is a wash sale, his misinterpretation is incorrect. His claim is refuted by Craig W's link to Fairmark.com, a reputable taxation web site.

Furthermore, every web site that I have ever read that provides an example of a wash sale violation utilizes 3 transactions. I have never seen one that utilized two transaction and I doubt that anyone claiming that two transactions is a wash sale can find a reputable citation. Believing that 2 transactions constitutes a wash sale violation is a misguided personal interpretation of tax law.

Back to the OP's question. Buying a security and selling it with 30 days does not constitute a wash sale. The same holds true for shorting.

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It appears that Fairmark.com is inadequate for some here. Per H&R Block:

The wash sale rules are designed to prevent people from selling investments and then buying the same stock back. Investors do this for the sole purpose of:

Creating a deductible loss

Using the loss to offset other shares sold for a gain Still keeping the stock or security in their investment portfolio

You can’t sell a stock or mutual fund at a loss and then buy it again it within 30 days just to claim the losses.

You’ll need to figure the basis for shares sold in a wash sale. When you do, add the amount of disallowed loss to the basis of the shares that caused the wash sale. These are the new shares you received. By doing this, you defer the loss, but it’s not disallowed for good. You’ll get the benefit of the loss when you eventually sell the new shares (unless it’s another wash sale!).

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, you might have bought fewer shares of stock or securities than you sold. If so, only the number of shares you bought is subject to the wash-sale rules.

In all of these tax related web sites, wash sale discussion involves REPLACEMENT shares not a round trip loss involving a single purchase and a single sale. Believing that to be a wash sale is misguided.