How to Report a Wash Sale on Your Tax Return

A wash sale occurs when you sell a security, like a stock or bond, at a loss and then repurchase a nearly identical one shortly before or after. This rule prevents investors from claiming a tax loss while essentially maintaining their investment position. The Internal Revenue Service (IRS) disallows the deduction of such losses in the year of the sale. Instead, the loss is deferred and adjusted into the cost of the replacement investment.

Identifying a Wash Sale and Required Information

Before you can report a wash sale, you must first identify one. The wash sale rule, found in Internal Revenue Code Section 1091, is a 61-day window. This period includes the 30 days before the sale that created a loss, the day of the sale, and the 30 days after. If you purchase a “substantially identical” security within this timeframe, the rule is triggered.

“Substantially identical” applies to buying and selling shares of the same company’s common stock. It also extends to contracts or options to buy or sell the stock. The rule also applies if your spouse or a corporation you control makes the purchase within the 61-day window.

Your primary source for this information is Form 1099-B, which you receive from your brokerage firm. Many brokers will identify wash sales for you, listing a “Wash Sale Loss Disallowed” amount in box 1g. This figure represents the loss you are not permitted to deduct for the current tax year.

The responsibility for tracking wash sales ultimately falls on you. Brokers are only required to track wash sales for identical securities within a single account. If you hold accounts at multiple brokerage firms, you must maintain your own records to track purchases and sales across all accounts to ensure compliance.

Completing Form 8949 for a Wash Sale

Once you identify a wash sale, report the transaction on Form 8949, “Sales and Other Dispositions of Capital Assets,” on its own line. For example, you bought 100 shares of XYZ Corp. for $5,000 and sold them for $4,000, a $1,000 loss. Within 30 days, you bought 100 new shares of XYZ Corp., triggering the wash sale rule.

First, determine if the sale is short-term (held one year or less) or long-term to select either Part I or Part II of Form 8949. You will also check Box A, B, or C at the top based on your Form 1099-B.

Next, fill out the columns: (a) property description, (b) and (c) acquisition and sale dates, (d) sale proceeds ($4,000), and (e) original cost basis ($5,000).

In column (f), enter the code “W” to signal a wash sale to the IRS. In column (g), enter the disallowed loss as a positive number, which is $1,000 in this example. This adjustment neutralizes the loss on the form.

Finally, calculate the gain or loss in column (h) using the formula: proceeds (d) minus cost basis (e) plus adjustments (g). For the example, this is $4,000 – $5,000 + $1,000 = $0. This zero-dollar result shows you are not claiming the capital loss in the current year.

Adjusting the Cost Basis of Replacement Shares

The wash sale rule defers your loss rather than eliminating it. The disallowed loss from the sale is added to the cost basis of the replacement shares you purchased. This adjustment ensures that you will recognize the deferred loss when you eventually sell the new shares.

The formula is: New Cost Basis = Purchase Price of Replacement Shares + Disallowed Wash Sale Loss. Continuing the previous example, if you purchased the 100 replacement shares of XYZ Corp. for $4,200, you would add the $1,000 disallowed loss. Your adjusted cost basis for the new shares is $5,200, which is used to calculate gain or loss when they are sold.

Another consequence involves the holding period. The holding period of the original shares is added to the holding period of the new replacement shares. This can affect whether a future sale qualifies as a short-term or long-term capital gain or loss.

Keeping personal records of these adjustments is important, especially if the wash sale occurred across different brokerage accounts. A clear record of the original purchase, the wash sale, and the new adjusted basis is necessary for accurate tax reporting in subsequent years.

Transferring Totals and Filing Your Return

After detailing all transactions on Form 8949, the totals are carried over to Schedule D, “Capital Gains and Losses.” The totals from Part I of Form 8949 are transferred to the lines for short-term transactions on Schedule D. Similarly, the totals from Part II are carried to the lines for long-term transactions.

Schedule D calculates your net short-term and long-term capital gains or losses to determine your overall capital gain or loss for the year. This final figure is then transferred to the main Form 1040. This amount is used to calculate your total income and tax liability.

Modern tax software simplifies this process, automatically populating the forms after you enter your Form 1099-B details. If filing a paper return, you must manually transfer the totals between the forms before mailing your return to the IRS.