A wash sale occurs when an investor sells a stock or security at a loss, then purchases the same substantially identical investment within 30 days or less. An example would be if you hold 100 shares of ABC stock with a cost basis of $1,000, having acquired the stock at $10 per share, and sell it for only $5 per share. While you'll make a capital loss of $500, purchasing new shares in ABC within the 30-day time limit means your capital loss is deferred until your sells the replacement shares. Under IRS rules, you cannot deduct the capital loss, but you still must disclose it on Schedule D. The wash rule applies to options, warrants and contracts to purchase replacement stocks. Investors who don’t report their wash sales risk incurring IRS penalties.
Review your brokerage account statements for trades that have closed with a loss during the year. Check to see if you purchased the exact same securities 30 days before or after the trade loss date. If so, you have a trade that classifies as a wash and must be reported to the IRS.
Go to the IRS website and download Schedule D and Form 8949. Starting with Form 8949, enter your name and Social Security number at the top of the form. On the line below, check the appropriate box as to whether the transaction was reported to the IRS with or without the basis.
Move down to Part 1 – Short-Term Capital Gaines and Losses – on Form 8949. Enter a description of the property and the number of shares purchased. For example, you might say "100 shares of ABC stock." Enter “W” in column B. The IRS requires that you identify the transaction with code "W" when a particular sales transaction is a wash sale.
In column C, use the information on your brokerage statement to enter the month, day and year you purchased the investment. In column D, enter the month, day and year you sold it. In column E, enter the sales price. In column F, enter the cost or other basis of the property.
Enter the total amount of columns D and E on line 2 at the bottom of the page. Transfer this information to Schedule D. Be sure the line you select on Schedule D corresponds to the box you checked on Schedule 8949. Enter the information on the appropriate line, and on Line 7, column H, as a negative. File Schedule D and Form 8949 along with your completed 1040.
Review all your brokerage statements carefully to be sure you don't overlook a wash transaction. You're in wash territory when two investments are identical or if they are "substantially" similar. It can be difficult to tell whether two investments are substantially similar – bonds having different interest and maturity dates do not qualify. If in doubt, take advice from a tax professional.
Although you cannot deduct a wash sale loss, you must report any gains you made on the trade.
Items you will need
- Schedule D, Capital Gaines and Losses
- Form 8949, Sales and Other Dispositions of Capital Assets
- Brokerage statement
- Review all your brokerage statements carefully to be sure you don't overlook a wash transaction.
- Although you cannot deduct a wash sale loss, you must report any gains you made on the trade.
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