 Hello and welcome to the session in which we would look at wash sale loss. This topic falls within the deferred and non-taxable gains and losses and specifically we're going to be dealing with losses because it says wash sale loss. Specifically wash sale loss or wash sale transaction deals with securities and what we mean by securities are stocks and bonds. So just know what we are dealing with here. You buy and sell stocks, when you buy and sell bonds and you incurred a loss. So this is what we need to learn about and that's why I have the Dow industrial here down 3%. Just kind of to remind you that wash sale loss deals with stocks and bonds. Before we proceed any further I have a public announcement about my company Farhat Lectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead start your free trial today no obligation no credit card required. So what is a wash sale transaction? A wash sale occurs when the taxpayer sells securities at a loss and acquires substantially identical securities or stock within 30 days before or after the date of the sale. Let's assume April 1st for the sake of illustration. I purchased 100 shares of Apple computers, 100 shares. Keep it simple at $100. So I paid $10,000. Here comes toward the end of the year December 20th. I noticed that Apple shares dropped to $80. Now I have $2,000 worth of losses. Why? Because if I sell the shares today I would only realize $8,000. So why would I sell them? Well I will tell myself look if I sell those shares the IRS allows me to deduct $3,000 of losses in selling stocks. So it's okay let me take advantage of this and sell those shares. So I will sell those shares December 20th and I incur a loss of $2,000. Say great I'm going to be able to deduct this loss on my 1040 against my ordinary income which is perfectly fine but on December 27th which is just seven days later I would say but I really like Apple shares. I want to go back and rebuy those shares. If I do that if I rebuy those shares within 30 days of the day of the sale and the 30 day goes before and after so when you sell at a loss you cannot have the shares purchased 30 days earlier or 30 days after. So you have basically 60 days to stay away from those shares. So if I buy those shares on December 27th it doesn't matter whether I bought on December 27th or January 5th the following year. The year has nothing to do with it. January 5th my loss of $2,000 will be disallowed. The loss will be tagged to my new cost basis. Let's assume I bought them at for the sake of simplicity the stock went up to 90 I bought them for 9,000. The loss that I deferred will be added to the 9,000. Now my new basis is 11,000 and what's my holding period? My holding period started April I don't know April 1st when I bought them initially. So that's the basic idea behind wash sale. So the loss from a wash sale is not allowed as a deduction instead it should be added to the cost basis of the newly purchased securities in contrast to gain realized on wash sale gain realized guess what the government says you're gonna have to pay taxes yet there's no such thing as wash gain right it's wash sale it's for a loss moreover the holding period for the newly acquired stock included the holding period of the stock or securities sold so simply put you'll go back to the original purchase which I purchased them back in April the wash sale rules don't do not apply to security dealers because they that's what they do they buy and sell security so if you're in the business of buying and selling stocks you're a security dealer the wash sale transaction don't apply so it applies to basically individuals like Q&I let's take a look at an example to illustrate this concept Elizabeth bought 1500 shares of AT&T stock on April 7th 20x1 on December 31st last day of the year she sold the shares and she incurred the loss of 4500 nothing you know you can do that and you can you should be able to deduct $3000 of losses however on January 25th Elizabeth bought not the whole thing but 1000 of the 5000 shares of AT&T of far 8000 so she bought back two third of them and one third she did not buy back so the sale transaction made on December 31st is a partial wash sale as it's followed by a purchase transaction within 30 days which is a period of 25 days the partial wash sales prevent Elizabeth from claiming the full 4500 she's only allowed to deduct one third of the loss because she did not replace one third of the stocks and one third of the loss is 1500 now she can deduct 1500 because she only bought back 1500 the remaining loss of 3000 increases the basis of the replacement stock therefore she paid 8000 for the new stock you taxed them the 3000 of the the third loss which will come up with 11000 remember she can deduct up to 3000 of losses but she was only able to deduct 1500 because she did not wait she should have waited 30 days in order to do that let's take a look at example 2 January 2nd X3 John acquired 100 shares of XYZ company for $20 per share on May 1st 20 X3 John sold the 100 shares at 12 you bought them at 20 sold them at 12 you have $8 per share loss that's fine that's fine that's on May 1st on May 14th John repurchased another 100 shares of XYZ stock for 1400 well if you bought back the shares and bought them back $14 per share well you're back to your original position guess what the loss that you incurred on May 1st is no longer allowed so determine the amount of the loss that John is allowed to deduct John re-acquired 100 shares of the same company on May 14th which is less than 30 days after the date which the original stock was sold therefore the loss of $8 which is 20 minus 12 is this allowed instead it will be added back which is the losses $8 times 100 shares $800 will be added to the shares cost that he purchased on May 14th as a result the stock acquired on May 14th will have a basis of 14 plus a dollar of the third loss which will have a $22 per share and what's the holding period the holding period starting on January 2nd 20 X3 which was the original stock purchase and this is basically what you need to know about the wash sale whether you are a CPA candidate EA candidate or an accounting student this topic is important go to far hat lectures work MCQs don't shortchange yourself invest in your career invest in yourself