Wash-sale Cost Basis Adjustment question

Question

I wonder about the Adjustments to Cost Basis after a wash sale occur. Considering this Example 1 ( from marketwatch.com) where someone:

On 1 Dec, 2018 used an amount of money in his account to buy 100 shares of XYZ Co., for $2000 (to make it simple , let's say 1 Feb, 2019 to turn all the transactions into the same year)

On 1 Apr, 2019 he sells the shares for $1200, and incurred a loss of 800$.

On 10 Apr, 2019 he bought back 100 shares for $1300, and had a wash sale. The 800$ loss gets added to the cost basis of this transaction( and the basis becomes $2100)

Now, If on 13 Apr 2019, he sold 100 shares for $1400; I'm pretty sure that the realized Gain/Loss record of this transaction would show something like this: " XYZ Co. shares 100 , Proceeds $1400 , Cost basis $2100(adjusted), Short-term Gain/Loss -$700 ". So, even though the Gain/Loss shows a negative number, he still got an actual profit of $100 from this sale, right?

Answer 1

Wash sale accounting doesn't change the amount of the gains or losses, just possibly when you can claim them.

Buy at $20, sell at $12 is an $8 loss and buy at $13 and sell at $14 is a $1 gain - for a total loss of $7.

Adjusting the cost basis due to the wash sale just shifts the cost basis around but the answer is still the same, a total loss of $7.

This would only become a tax issue if the $800 wash sale loss occurred in one tax year and the replacement shares were not sold until the following year (a carryover wash sale violation). You'd still have the same total loss but claiming it would occur on two different tax returns.

Answer 2

I'll add a tabular example to understand the share cost basis adjustment resulting from a wash sale.

Let's assume the following trade history on Stock A:

Date	Action	Stock A price	Gain/loss	Commutative Gain/loss
2020-02-07	Buy 100 of stock A	10	0	0
2020-03-17	Sell 100 of stock A	20	1000	1000
2020-03-22	Buy 100 of stock A	18	0	1000
2020-03-29	Sell 100 of stock A	3	-1500	-500
2020-04-10	Buy 50 of stock A	2	0	-500
2020-04-15	Sell 50 of stock A	3	50	-450
2020-05-15	No activity on stock A	3	0	-450

This will result in the following tax activities:

Row	Date	Action	Stock A price	Stock A cost basis	Gain/loss	Cumulative Gain/loss	Taxed Capital Gains	Cumulative Taxed Capital Gains
1	2020-02-07	Buy 100 of stock A	10	10	0	0	0	0
2	2020-03-17	Sell 100 of stock A	20	20	1000	1000	1000	1000
3	2020-03-22	Buy 100 of stock A	18	18	0	1000	0	1000
4	2020-03-29	Sell 100 of stock A	3	3	-1500	-500	-1500	-500
5	2020-04-10	Buy 50 of stock A	2	2 + (18-3) = 17	0	-500	1500*(50/100) =750	250
6	2020-04-15	Sell 50 of stock A	3	3	50	-450	(3-17)*50 =-700	-450
7	2020-05-15	No activity on stock A	3	NA	0	-450	0	-450

Notes:

• Row 5: The change in Stock A cost basis during the stock purchase results from the wash sale in row 4. I.e., the wash sale loss (a.k.a. disallowed loss) is added to the basis of the replacement stock. Since the individual purchased 50 replacement shares whereas the preceding sale involved 100 shares, only 50 shares are considered to be part of the wash sale, hence 1500*(50/100)=750 USD.
• Row 6: Whereas the sale of 50 shares of Stock A caused a capital gain of 50 USD, from the tax standpoint it reduced the amount of capital gain tax by (3-17)*50=-700 USD, since 17 USD is the cost basis that was used in row 5 when purchasing the 50 shares of Stock A.
• I assume that all trades took place in a taxable brokerage account. See Wash sale rules between tax-advantaged and regular accounts for tax-advantagious accounts.
• Feature request to add an option to display the table full screen (or at the least some larger view) when viewing a table as a reader, since it is quite annoying to do the horizontal scrolling for wide tables.