How To Remove A Wash Sale | Wash Sale Examples with Cost Basis Adjustment | FAQ | Averaging Down

In this video, I’m going to talk about what some of your options are once you have a wash sale on stocks and even more examples of different scenarios involving wash sales than in my first wash sale video. Averaging down is an investing strategy in which an investor purchases additional shares of a previously initiated investment after the price has dropped further.

The first question I’ll go over is whether the amount of the wash sale is taken out of the cash of your brokerage account? The answer to this is no, it is an accounting adjustment and the wash sale loss amount is not taken out of your account for a repurchase.

The second question is how did a wash sale happen? So typically when an investor initially discovers wash sales, it’s usually from causing 1 by mistake without knowing about the wash sale rule first. Wash sales happen when there is a loss taken on a stock and then the same stock or an option on that stock is repurchased within 30 days before or after selling which causes a wash sale to be triggered disallowing the loss. In the 2 days after the shares are sold, you can designate if you only want the in-the money shares sold or a mix of shares depending on your purchase prices. This can be done on the trade activity screen and it should be called “reassign lots”.

The third question is on calculating the net gain or loss on your stock purchases when there is a wash sale and I’ll speak to the 2 ways a wash sale can be added to the shares you own. Generally a broker will match it back to how many shares were sold at a loss and add the wash sale amount on that same amount of shares repurchased. If you own or bought less shares, then they will spread the loss evenly across however many shares you own.

The fourth question is, should you get rid of a wash sale or hold it? The answer to this is really situational based on what’s in your portfolio and what your strategy is for any particular stock, so honestly, it depends. But I’d say don’t let a specific wash sale alone dictate whether you buy, sell or hold a stock. Set targets and have reasons you want to either buy, sell or hold. Those reasons could be technical reasons, fundamental reasons, a combination of both, some news came out that changed your opinion or outlook for the stock or because you might need to because of a margin call or margin interest is adding up.

The fifth question is if you have a wash sale, how do you get rid of it or clear it so that it doesn’t impact future trades on the same stock? So when you already have a wash sale, it won't go away until you take 1 of the following actions:
• you specifically sell only the shares with the wash sale at a profit above the wash sale adjusted cost basis
• you sell all shares of that stock completely and not buy that same stock back or an option on that stock for 30 days (some shares could be at a profit or a loss)
• sell all shares at profit above the wash sale adjusted cost basis

The sixth question is in what situations would you want to intentionally cause a wash sale once you understand how the wash sale rule works? The primary reason would be if you are at a loss and maybe have been for some time and either think the trade isn’t working out like you hoped it might and you’re somewhat close to breaking even and sell at a loss with the intention of buying it back again if it goes lower within 30 days. This would intentionally cause a wash sale if and when you repurchase the same stock within 30 days.

The seventh question is if you want to clear up your trades for tax season and you want to realize your losses for the current calendar year towards the end of the year around November or December, should you sell your stocks and options and stop trading all wash sale positions for 31 days going into a new year or is it better to avoid wash sales whenever possible to not have these problems? Both are definitely good options to keep your 1099’s clean for your taxes. I think the first option is slightly better, because avoiding all wash sales can potentially cause you to make some investment decisions you otherwise might not have over the course of the year.
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The ideas, contents and opinions presented in this video are for entertainment purposes only. Bryan does not give tax or investment advice. All information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor. Past performance is not indicative of future results. All investing involves risk, including the possible loss of principal. Bryan is not a Financial Advisor, Tax Advisor or CPA/Accountant. Only you are responsible for the financial decisions that YOU make.

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