How to Report a Disallowed Loss Amount on Schedule D

The wash rule can trip you up when reporting stock capital gains on your income taxes.

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For investors, the wash rule can make tax time complicated. Active traders often buy and sell stock throughout the year, sometimes at a loss. Usually, that loss can be claimed on your taxes, but not if you turn around and buy a very similar stock within 30 days. To protect against fraud, the IRS came up with the 30-day wash rule, which says that you can’t claim your loss on your taxes if you bought a stock it would consider the same or “substantially similar” within 30 days of the sale. By disallowing this, the IRS intends to prevent the practice of selling a stock at a loss, then buying again, only to claim the loss on that year’s taxes.

Reporting a Disallowed Loss

To report your disallowed loss, you’ll first look at the Form 1099-B that comes from your broker at the start of the year. Box 5 on that form will be checked, indicating that the reported loss was a noncovered security. To report it on Schedule D, start with Form 8949: Sales and Other Dispositions of Capital Assets. Whether it’s allowed or disallowed, you’ll input your loss in Column h. The code for a wash sale is “W,” which goes in column f in the row where you’re inputting the loss. Simply complete all the information and get a total, which you can then transfer to the corresponding lines on Schedule D.

Exceptions for Brokers

Although investors can’t claim the loss if a similar stock was purchased within 30 days, this rule doesn’t apply to dealers for whom the transaction is part of doing business. Since dealers regularly sell at a loss and buy similar stocks within a short time period, they can claim the loss when they file their business taxes.

2018 Tax Law Changes

If you sell your stock at a profit, you’ll need to pay attention to the new tax brackets under the Tax Cuts and Jobs Act. You can actually save money if your tax bracket has dropped as a result of the changes. For instance, if you have an income of $50,000, you would have owed taxes of 25 percent on your gains in 2017. Under the new brackets, you’ll owe only 22 percent on any capital gains.

Filing 2017 Taxes

If you’re still filing your 2017 taxes, you’ll use Schedule D to report any disallowed losses. If you have allowed losses, enter those on Schedule D. Your 1099-B will have the information you need to complete Schedule D for your 2017 taxes.

Tip

  • If you had a disallowed loss from a wash sale, make sure you add the loss to the cost basis of the replacement stocks. When you eventually sell the replacement stocks, you will be able to claim the loss at that time. For example, if you had a disallowed loss of $500 on XYZ stocks, and the replacement XYZ stocks cost you $5,000, your new cost basis will be $5,500. If you sell the stocks next year for $6,000, you will have to report a gain of only $500.

Photo Credits

  • Ryan McVay/Photodisc/Getty Images

About the Author

Stephanie Faris is a novelist and finance writer whose work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. She has written about finance for entrepreneurs and marketing firms since 2013.


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