If you’re an investor, you may have heard of the term “wash sale”. A wash sale occurs when you sell a security at a loss and then buy it back within 30 days. This results in a disallowed loss for tax purposes.
So, how do you calculate a wash sale? Here’s what you need to know.
Step 1: Identify the Security
The first step in calculating a wash sale is to identify the security that you sold at a loss. This could be a stock, mutual fund, or other investment.
Step 2: Determine the Loss
Next, you need to determine the amount of the loss from the sale of the security. This is calculated by subtracting the sale price from the purchase price.
Step 3: Identify Replacement Securities
Now, you need to identify any replacement securities that you purchased within 30 days of the sale. This includes any shares that you bought in the same company or any similar securities.
Step 4: Calculate the Basis
Once you’ve identified the replacement securities, you need to calculate the adjusted basis of those securities. This is the purchase price plus any transaction costs, such as commissions.
Step 5: Reduce the Loss
Finally, you need to reduce the loss by the amount of any replacement securities. This will result in the disallowed loss.
Example Calculation
Let’s look at an example to see how this works.
You sell 100 shares of XYZ stock for $1,000. You originally purchased those shares for $1,500, so you have a loss of $500. Within 30 days, you buy 100 shares of XYZ stock for $900.
The adjusted basis of the replacement shares is $900 + $10 (commission) = $910.
You need to reduce the loss by the amount of the replacement shares, which is $910. This results in a disallowed loss of $410 ($500 – $90).
FAQs
Q: How do I report a wash sale on my taxes?
A: You need to report the disallowed loss on Schedule D of your tax return.
Q: Can I avoid a wash sale by buying a similar security?
A: No, a wash sale occurs when you buy back the same security or a substantially identical security.
Q: What if I sell a security for a gain and then buy it back within 30 days?
A: This is not considered a wash sale and the gain is taxable.