This tax season I saw an explosion of wash sale questions. There have been more in the last three months than in all my previous years helping treasurers. I believe this is because of new rules requiring brokerage firms to track and report cost basis information.
For this article we’ll define a wash sale as well as discuss the consequences of a wash sale and how it’s recorded in the accounting software. A wash sale has two parts. First is the sale of a security for a loss. The next is a purchase of shares of this same security within 30 days before or after the sale. (If the sale results in a gain, there’s no wash sale even if shares were purchased within the 30 days before and after the sale.) When this occurs special rules apply to the loss from the sale.
First, clubs cannot claim the loss from the wash sale as a capital loss. Next, the cost basis of the shares purchased is increased by the amount of the loss. This allows for realizing the original loss when the replacement shares are sold. Finally, the holding period of the newly purchased shares includes the holding period of the shares sold in the wash sale.
How to accomplish these requirements in the accounting software depends on the specifics of the sale and purchase transactions. A major factor is whether more or fewer shares were purchased than sold. This determines how much of the loss from the sale is disallowed and how much the cost basis of remaining shares needs to be adjusted.
There are some common features to account for wash sales. In general the process involves the following:
* Deleting or editing the sell transaction
* Deleting or editing the buy transaction
* Entering a return of capital transaction
Although the transactions aren’t difficult to enter, calculating the amounts can be time-consuming. You may need to view multiple accounting reports as well as inspect your individual transactions to gather all the information required to make the calculations for the entries. The date assigned to the wash sale transactions are important so that the proper block of shares has its cost basis adjusted to reflect the wash sale rules.
Save yourself some extra work and watch your buy and sell decisions to avoid wash sales. But don’t let the small amount of extra work drive investment decisions that otherwise make sense to your investment goals.
Russell Malley is the Club Accounting Adviser for ICLUBcentral and frequent contributor to the Investor Advisory Service investing newsletter. For more information on ICLUBcentral and the Investor Advisory Service, click on www.ICLUB.com and www.InvestorAdvisoryService.com.