Contributed by: Henry, FreeTaxUSA Agent, Tax Pro
If you sell capital assets (such as stocks and bonds), then you should receive Form 1099-B at the end of the year from your brokerage. This form reports the sales proceeds and may include a “wash sale loss disallowed” amount:
Let’s look at what that means and how it needs to be handled.
What is a wash sale?
The IRS allows you to claim up to $3,000 in capital losses each year. However, they don’t want taxpayers to abuse the ability to claim capital losses to offset other income, so they disallow losses that result from a wash sale. A wash sale happens when you sell a stock at a loss and within 30 days, before or after the sale, you buy substantially identical stock. For example, you buy 100 shares of XYZ Corporation for $1,000 on December 15, 2022. You sell these shares for $750 on March 2nd, and you buy 100 new shares of XYZ Corporation for $800 on March 10th of the same year.
The sale of the 100 shares on March 2nd would be considered a wash sale. Since you bought substantially identical stock, you can’t deduct your loss of $250 on the sale. Instead, you add the disallowed loss ($250) to the cost of the new stock ($800) to obtain your basis in the new stock ($800 + $250 = $1,050).
Reporting a wash sale with FreeTaxUSA
While you can’t deduct the loss from a wash sale, the IRS requires you report the disallowed loss on Form 8949. Here’s how to enter it in the software.
- Follow the menu path: Income < Common Income > Stocks or Investments Sold (1099-B) and enter the information about the transaction as prompted.
- You’ll come to a screen where you're asked if you have a wash sale. Answer “Yes” and you’ll be prompted to enter the wash sale loss amount.
When you're done, the disallowed loss will show in column (g) on Form 8949.
Tip: If you're reporting a stock summary, report the total of all wash sales for the same type of transaction (i.e. short-term, long-term).
What happens when you sell the new stock?
When it’s time to report the sale of the substantially identical stock that you purchased as a result of a wash sale, be sure to account for the increased basis. To do that in our software, follow these steps:
- Follow the menu path: Income < Common Income > Stocks or Investments Sold (1099-B) and enter the information about the transaction as prompted. Enter the amounts (including the cost or other basis) as they appear on the 1099-B you received.
- A screen will be provided where you're asked if you have adjustments to the investment sale. If the increased basis related to the wash sale doesn't show in Box 1e, answer “Yes” and indicate the basis shown in Box 1e is incorrect.
- On the next screen enter the correct basis amount. From our example above, you’d enter $1050 .
The wash sale basis adjustment will be reported in column (g) of Form 8949, resulting in less taxable income in column (h).
Tip: Generally, your broker will report the adjusted basis on your 1099-B and an adjustment isn't required in the software. Pay close attention to this detail when reporting your stock sales. You can contact your broker for clarification on your 1099-B, if needed.
