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Wash Sales, Short Positions and General Concepts
Posted by Henry Gage on 30 March 2010 03:35 AM
Regarding: Wash Sales, Short Positions and General Concepts

Wash Sales for short positions is likely the most complex wash sale case. We added date preferences because there was not a single hard and fast rule and experts seems to disagree. For some of these issues we have sought IRS advise which resulted in months of time followed by an inability to answer the question.

Wash Sales carry the date of the original wash causing trade into subsequent acquisitions. TAPro uses the term open and acquisition to mean the data the positions was created. TAPro uses the term closed to refer to the date when the position was closed. For example if you Buy to open then the Sell date is the date of the close. If you Short Sell to open then Buy to Cover is the date of the closing trade.

General Concept - Open Positions can trigger Wash Adjustment:
On a related topic we know there are other products on the market that will go back in time and basis adjust closed positions. TAPro calculates in a way that favors the IRS by taking a conservative interpretation of the rules. Bottom line is they want to tax gains. Here is a bit more insight on this topic...

For a moment let's assume that closed trades could cause a wash adjustment and receive a corresponding basis adjustment. This means they are reopened and the gain/loss is recalculated, which could result in positions that closed at a gain now closing at a loss and becoming a candidate for a wash sale adjustment by another trade within 30 days. This means you could go back through time and reopen a list of closed trades and create new wash adjustments with no beginning in sight. This means you could find a need to restate prior year gains. TAPro does not allow this!

Here is the implication of this translation. If you can go back in time and change gains to losses by a trade in the present then a large loss in the present could reverse gains from a prior period. This is the opposite of the spirit of the rule. They don't want you to hide gains by showing present losses. They want to see your gains so you can pay taxes on the gain, not wipe out prior gains resulting in a larger refund. The wash sale rule prevent showing a loss in the present and then holding positions with built in gains. People were selling on 12/31/YYYY at a loss then buying on 01/01/(YYYY+1)

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