How to Report a Wash Sale
The IRS does not allow deductions for losses on a wash sale. A wash sale occurs when you use the proceeds from a stock sale to purchase "substantially identical" stocks within 30 days of the sale that realized the loss. Stocks of different companies are not substantially identical, but warrants, preferred and common shares of a single company, could be for wash sale purposes.
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Things You'll Need
- Form 1040, Schedule D Cost basis and sale proceeds information from broker
Instructions
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Identify wash sale on Schedule D. A wash sale is reported on Schedule of Form 1040 as either a short term (line 1) or long term (line 8) capital gain. The full amount of the loss is entered in column (f). Use parentheses to denote a loss.
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Balance disallowed loss. In the entry immediately following the loss (within the space provided for either line 1 or 8), write "Wash Sale" in column (a) as the description of the property. Enter the amount of the disallowed loss from column (f) of the previous entry as a positive amount (no parentheses).
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Add loss to new cash basis. Add the amount of the disallowed loss to your existing cost basis for the replacement securities. Use this basis to calculate a future reportable gain or loss once you have not traded in a stock for 31 days or more.
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Tips & Warnings
If you purchase more shares than you sold for a loss, only the percent of the new shares corresponding to the proceeds from the sale carry the loss forward in their basis.
Active traders could be prevented from claiming a deduction for a loss indefinitely until a period of 31 days without purchases lapses after the last sale.
