Where your disallowed losses actually went

A wash sale happens when you sell at a loss, then buy a substantially identical position within 30 days. The window is 61 days wide in total: the 30 days before, the sale itself, the 30 days after. Both sides count, which catches people who only look forward.

The loss on that sale is disallowed. The same amount is added to the replacement position's cost basis. Buy back at 50 carrying a 3 dollar disallowed loss and your basis becomes 53. When you finally close that position and stay out, the deferred loss comes through.

Substantially identical covers the same stock, and options to buy the same stock can count too. A different company in the same sector does not.

Trading a short list of names repeatedly is what sets it off. Scalp one index ETF for a living and nearly every losing exit has a replacement inside 30 days. You are back in the ticker tomorrow morning.

Inside a single year that mostly comes out in the wash, which is where the name comes from. A loss disallowed in March folds into the basis of the April position. Close that one and the deduction arrives late rather than never.

What ends a chain is being flat. Sell the last replacement and stay out of the name for 31 days. The deferred losses land in the year of that final sale. The chain does not end because the calendar turned over.

Carrying a wash-sale-tainted position into the new year is the version that produces a bill bigger than your profit. The disallowed losses sit in the basis of a position you still hold. They do not reduce this year's income. Every gain you realised does.

The arithmetic is the ugly part. Suppose you realised 90,000 in gains and 85,000 in losses, so you actually made 5,000 on the year. If 60,000 of those losses are disallowed and locked in an open position, your reported gain is 65,000. You owe tax on money you no longer have in the account.

Closing the chain and staying out of the name through the end of December is what avoids it. Work out which names carry disallowed losses in November, not in April.

Brokers match wash sales within one account and one exact security. That is what the reporting rules require of them, and it is what your 1099-B reflects.

The rule you are taxed under is wider. The IRS applies it across every account you control. Sell at a loss in your taxable account. Buy the same stock in your IRA inside the window and it counts. The IRA version is the worst case. That disallowed loss never lands in a basis you can use.

So two brokerage accounts trading the same names produce a 1099-B that understates the problem. A taxable account plus a retirement account does the same. Reconciling that across accounts is your job, and nobody sends you a reminder.

Traders who qualify for trader tax status can make a Section 475(f) mark-to-market election. Under it, open positions are treated as sold at year end at market value. Trading gains and losses become ordinary. Wash sale rules stop applying to the trading business.

It also removes the 3,000 dollar annual cap on deducting net capital losses against other income. A trader with a bad year can take the whole loss that year. No more 3,000 at a time for a decade.

The timing is what catches people. For an existing individual taxpayer, the election is filed by the unextended due date of the prior year's return. You commit to a year before you know how it goes. Qualifying for trader tax status has its own tests around frequency, volume and intent. Talk to a tax professional before you file anything.

Run it in November, while you still have time to act on what it finds.