Can wash sale losses offset capital gains?

Question of the week: A client sold two different stocks, then he repurchased them a few weeks later. Can he offset his wash sale losses with wash sale capital gains?

April 29, 2020

Q. A client sold shares of two stocks and repurchased them a few weeks later. Since one sale was a wash sale loss and the other was a capital gain, can the two transactions offset each other?

A worried client sold shares of two different stocks at the end of March. He had a long-term capital loss on stock “A” but a short-term capital gain on stock “B.” A few weeks later he figured he’d acted too hastily and repurchased the same number of shares of both stocks, deciding they were “good bargains.” So far, he is still holding both stocks. Since he has two wash sales, can he offset the loss on “A” with the gain on “B?”

A. Your client can’t claim the wash sale loss; gain on the other sale must be recognized immediately. The two sales cannot offset each other.

Your client has only one wash sale. He cannot offset the wash sale loss on “A” with the capital gain on “B.”

A wash sale occurs under §1091 when a taxpayer sells stock or other securities at a loss and, within 30 days before or after the sale, buys substantially identical securities. The disallowed loss increases the taxpayer’s basis of the repurchased securities. Report the wash sale loss on Form 8949, Sales and Other Dispositions of Capital Assets showing code “W” in column (f) and the loss amount as a positive number in column (g). See Form 8949 instructions.

For instance, say that your client’s loss on stock “A” was $1,000 and he repurchased stock “A” for $3,000. His basis in the repurchased shares would then be $4,000 ($3,000 purchase price + $1,000 disallowed loss). Also, the holding period on the repurchased shares includes the holding period for the shares that were sold. If your client changes his mind yet again this year and sells the stock without repurchasing it, he will figure long-term gain or loss based on the sales price and his $4,000 basis.

The wash sale rules do not apply to the sale of stock “B” because that stock was sold at a gain. Therefore, the short-term capital gain resulting from the sale of “B” must be recognized immediately. The fact that your client repurchased the “B” shares within 30 days as well is not relevant because this sale/repurchase isn’t a wash sale. The wash sale loss of “A” cannot be used to offset the gain from the sale of “B” or gain from any other sale. However, your client can offset the gain on “B” with losses from other sales this year under the usual long- and short-term capital gain netting rules, assuming wash sale or other rules don’t prevent recognition of the other losses.

You stated that your client sold and repurchased the same number of shares of “A.” Had that not been the case, the shares purchased should be matched to the number of shares sold. For example, if he sold 250 shares but repurchased only 225 shares of “A” within 30 days, then the loss on 25 shares of “A” would be immediately recognized.

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