How to Report a Wash Sale With Form 8949 Code W
Accurately report a disallowed investment loss using Form 8949. This guide explains the function of Code W and its impact on your cost basis for tax purposes.
When reporting the sale of investments, taxpayers use Form 8949, Sales and Other Dispositions of Capital Assets, to detail each transaction for the Internal Revenue Service (IRS). This form uses a series of codes to provide additional information about the figures being reported. These codes clarify adjustments to the gain or loss on a sale. This article will focus specifically on the use of Code W, which is designated for reporting a wash sale, and how to correctly complete the form when this situation occurs.
Understanding the Wash Sale Rule
The wash sale rule is an IRS regulation that prevents investors from claiming a capital loss on the sale of a security if they acquire a “substantially identical” one within a specific timeframe. This period covers 61 days: 30 days before the sale, the day of the sale, and 30 days after the sale. This rule applies to stocks, bonds, and options contracts. The purpose of this regulation is to stop taxpayers from creating an artificial loss for tax purposes while maintaining their investment position.
“Substantially identical” refers to the stock or securities of the same company. For instance, selling shares of a specific technology company at a loss and then buying shares of the same company back within the 61-day window constitutes a wash sale. It does not mean buying shares of a different company in the same industry. The consequence is that the loss from the sale is disallowed for the current tax year. The disallowed loss is added to the cost basis of the newly acquired, replacement securities.
Information Needed to Report a Wash Sale
Before filling out Form 8949, you must gather specific information about your investment transactions. The primary document you will need is Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, which you should receive from your brokerage firm. This form summarizes your sales activity for the year and contains the necessary details for tax reporting.
From your Form 1099-B, you will need to identify the description of the property sold (Column 1a), the date you originally acquired it (Column 1b), and the date you sold it (Column 1c). You will also need the sales proceeds (Box 1d) and the cost basis (Box 1e). For a wash sale, your broker will often report the amount of the disallowed loss in Box 1g, labeled “Wash sale loss disallowed.”
How to Complete Form 8949 Using Code W
Once you have your Form 1099-B, you can complete Form 8949. You will report the transaction on either Part I for short-term transactions (assets held one year or less) or Part II for long-term transactions (assets held more than one year). You will enter the description of the asset in column (a), the date sold in column (c), the sales proceeds in column (d), and the cost basis in column (e).
The next step is to account for the wash sale itself. In column (f), you will enter the letter “W” to signify that the transaction is a wash sale. Then, in column (g), for adjustments, you will enter the amount of the disallowed loss from Box 1g of your 1099-B as a positive number. This adjustment effectively cancels out the loss you would have otherwise claimed on the sale for the current tax year.
For example, imagine you sold 50 shares of a stock for $4,500, which you had originally purchased for $5,000, resulting in a $500 loss. Within 30 days, you bought 50 new shares of the same stock. On Form 8949, you would report the $4,500 proceeds and $5,000 cost basis. You would then enter “W” in column (f) and $500 in column (g).