How to Report a Disallowed Loss Amount on Schedule D
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.
Understanding "Substantially Similar"
Also referred to as "substantially identical," these types of securities don't adhere to a hard-and-fast IRS definition. Investors and brokers must apply this meaning using their best judgment so they don't violate the wash sale rule.
As one example of this, an investor could use the proceeds from selling a stock at a loss that's closely aligned with the S&P 500 Index to purchase another stock that has similar but not identical attributes that may be more closely aligned with the Russell 1000 Index. The differences between these two securities is likely outside the definition of "substantially similar" or "substantially identical" and, therefore, not considered a wash sale.
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. If it’s disallowed, you’ll input your nondeductible loss in Column (g). 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 example, single filers (and married taxpayers who file a separate tax return) with an income of $50,000 will owe taxes of 15 percent on their capital gains in 2018, but married taxpayers (and heads of household) at this same income bracket (filing a joint return) pay no capital gains tax.
- 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.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. 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. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.