FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client sells 100 shares of ABC stock at a $2,000 loss on November 15. On December 5, the same client repurchases 100 shares of ABC stock in the same account. Under IRS wash sale rules, what is the tax treatment of this transaction?
- AThe $2,000 loss is disallowed permanently and cannot be used for any tax purpose
- BThe $2,000 loss is disallowed and added to the cost basis of the newly purchased shares
- CThe $2,000 loss is fully deductible in the current tax year
- DThe $2,000 loss can be carried forward indefinitely as a capital loss carryforward
Show answer & explanationAnswer & explanation
Correct answer: B. The $2,000 loss is disallowed and added to the cost basis of the newly purchased shares
The wash sale rule disallows a loss deduction when substantially identical securities are repurchased within 30 days before or after the sale. The disallowed loss is not lost permanently; it is added to the cost basis of the newly acquired shares.
Why the other options are wrong
- A. Incorrect — the loss is not permanently lost; it is deferred via basis adjustment.
- C. Incorrect — the loss is disallowed because the repurchase occurred within the 30-day window.
- D. Incorrect — wash sale losses are added to basis, not carried forward as a separate loss.
Wash Sale Rule
An IRS rule disallowing a tax loss deduction when a substantially identical security is purchased within 30 days before or after the sale generating the loss.
- 30-day window applies before and after the sale (61 days total)
- Disallowed loss is added to the cost basis of the new shares
- Applies to stocks, bonds, and options on the same security
Memory trick: Wash it, and the loss 'washes into' your new cost basis.