From: alien@boi.hp.com (Tom von Alten)
Subject: Re: FAQ -- Wash Sale Rule
Date: Wed, 14 Oct 1992 19:03:51 GMT
Organization: Hewlett-Packard
X-Newsreader: Tin 1.1 PL3

Try this on your 80 column terminals:
_____________________________________

Q:  What is the "wash sale rule," and how is it applied?

A:  The "wash sale rule" is an IRS rule that limits ones ability to claim
    capital losses in certain circumstances when identical shares are sold
    and repurchased within a short time period.

  (1)  A wash sale occurs when you sell and buy essentially identical
       securities and the sale and purchase are within 30 days of each
       other.  In the funny way the IRS counts, you start counting from the
       day AFTER or BEFORE, depending on which way you are going, so you may
       see this quoted as being 31 days.  For example, If you sell shares of
       XYZ on January 1, and buy shares of XYZ on January 31 of the same
       year, you have a wash sale.  This is probably the most common case
       (sell then repurchase within 30 days).  However, if you buy shares of
       ACME on July 1 and sell different shares of ACME on or before July 31
       of the same year, you have also executed a wash sale.

  (2) If a wash sale results in a loss, that loss receives "special" tax
      treatment.  However, if a wash sale results in a gain, the gain
      receives no special treatment.

   In either case, the rules work "in favor of the IRS" (who woulda guessed
   it?).  Basically, you must take your (potentially short-term) gains, and
   you must defer declaring your (potentially short-term) losses.  Most tax
   wisdom says try to hold off declaring you gains and accelerate your
   losses, but the IRS doesn't let you in this case.

   Why this rule?  Well, if you'll allow me to hazard a guess...  The IRS
   doesn't want people writing off "fake" losses.  In order to claim a loss,
   you really gotta convince them that you were seriously out of the
   security.  You gotta take at least a little risk that it goes up on you
   while you are on the sidelines.  If you could sell and buy on the same
   day at the same price, that would be the epitomy of a wash sale.  You
   didn't really want to get rid of the security, you probably just wanted
   to take a loss for tax purposes (the offsetting gain to be taken some
   years down the road, and perhaps with more favorable tax treatment,
   etc.).  So, the IRS says "No way, Pal!"

  (3) In the case of a loss, although you are not allowed to report it and
      "deduct" it from any similar (ST or LT) gains, you are allowed to
      adjust the basis of the newly purchased (or replacement) shares by the
      amount of the disallowed loss.

  (4) For purposes of the holding period calculation (to determine short
      versus long term gains/losses), the holding period of the "old"
      securities is added to the holding period of the "new" securities
      after a wash sale loss is deferred.  (Sorry folks, you can't use a
      wash sale to convert long term losses into short term losses.)

  (5) Losses from a wash sale of one block of shares can NOT be used to
      offset gains from another block of shares sold on the same day.
      Example:  Let's say you bought 100 shares of ZZZ for $1000 ($10/sh)
      and later bought 100 more for $2000 ($20/sh).  You sell all 2000 at
      $18/sh.  Within 30 days before or after the sale you buy/bought 1000
      other shares of ZZZ at any price.  The sale is treated as (1) a sale
      for gain of the 1000 shares bought at $10/share, and (2) a wash sale
      with respect to the 1000 shares bought at $20/share.  You can not
      treat this as a single transaction of selling 2000 shares for a net
      gain of $600.  It is a gain of $800, and you hold 1000 shares with an
      adjusted basis of (new purchase price + $200 + any commission paid on
      the wash sale of 1000 shares).

Ref:  IRS Pub 550, check here for additional details such as the definition
   of "identical securities".  Information is indexed under "Wash Sales" and
   also under "Holding Period."  In 1990 version, that's pages 37 and 45.

Note that participation in certain stock purchase programs, such as an ESPP
(employee stock purchase plan), increase the likelihood that a wash sale
will occur.  This is because the regular stock purchases result in a large
percentage of days being included within the wash sale time frame.  In
addition, if stock is purchased at a discount, participants may perceive
that stock has been sold for a gain when it actually has not.  The basis of
the stock is usually the market price on the date of purchase, not the
actual price paid.  The discount in this case is treated as ordinary income,
and sale of shares at a price between the original purchase and market
(basis) prices will result in a capital loss, though the participant may
make money on the deal.

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-steve p.          The facts are facts, the opinions are mine.
                   Standard disclaimers apply.  No warranty.
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