What is a Wash Sale?
The wash sale rule prevents you from taking a loss when you buy replacement stocks or securities within 30 days before or after you get rid of the same stock or security.
For the wash sale rule, "stocks and securities" include contracts or options for securities. Also, the replacement securities don't have to be exactly the same - just substantially identical.
If you fall under the wash sale rules then you cannot deduct losses unless you are a securities dealer and the trade was part of your business activity.
The tax or cost basis of the replacement securities is the new cost increased by the disallowed loss. This applies even if you buy the replacement stock in a different account. Buying the replacement stock in an IRA can be especially painful since cost basis is not typically recognized in these accounts. Therefore, the loss on the sale would be lost.
For more details on wash sales, see IRS publication 550.
Example of a Wash Sale
Say you purchased 100 shares of Widgets Inc. on March 17, 2003. You sold the 100 shares at a loss of $2,500 on July 18, 2010. On July 25, 2010 you bought 100 more shares of Widgets Inc. for $6,000.
You cannot deduct the $2,500 loss on your 2010 return because you bought the replacement shares within 30 days before or after the sale. Instead, add the loss to the basis of your replacement shares. The cost basis of these new shares is $8,500 ($6,000 + $2,500). Your date acquired was March 17, 2003 (not July 25, 2010). The wash sale defers your $2,500 loss until you sell the new shares.
How to Report a Wash Sale
Even though losses from wash sales are not allowed to be taken, the sale still has to be reported in the year that it was made.
Wash sales are reported on Schedule D.
First, an entry is made that shows the sale of the stock on Schedule D.
The following transaction shown on Schedule D is a entry that reverses the loss for a net loss of $0.
TurboTax will guide through the process of reporting your wash sales.