Wash Sales and Holding Period Calculations

For the purposes of determining the long-term versus short-term nature of the holding period for tax lots purchased during a wash sale period (known as ‘replacement lots'), there are two generally acceptable methods used by cost basis systems.

One of these is known as the ‘Replacement Method'. Under this approach, the holding date of the wash-adjusted replacement lot is equal to the acquisition date or holding date of the original purchase.

Example of Replacement Method:

Client buys Lot A on 1/12/2013 and sells it for a loss on 1/20/2013. Client purchases the identical stock on 2/2/2013 (Lot B). Using the replacement method, the holding period of Lot B becomes long-term in nature on 1/13/2014 (> 365 days), as if the replacement purchase occurred on 1/12/2013 and not on 2/2/2013.

The second method is known as the ‘Tacking Method'. Under this approach, a cost basis system calculates the actual number of days between the original purchase and the subsequent sell for loss to determine the holding period of the wash-adjusted replacement lot.

Example of Tacking Method:

Client buys Lot A on 1/12/2013 and sells it for a loss on 1/20/2013. Client purchases the identical stock on 2/2/2013 (Lot B). Using the tacking method, the holding period of Lot B becomes long-term in nature on 1/26/2014 (> 365 days), because the days the original shares were held were ‘tacked on' to the replacement purchase.

The equation utilized in this approach can be summarized as follows:

{Acquisition Date of Replacement Buy – (Trigger Sell Date – Original Buy Date)} = Holding Date of Replacement Buy

(Trigger Sell Date – Original Buy Date) = (1/20/13 – 1/12/13) = 8 days

(Acquisition Date of Replacement Buy – (8) = Holding Date of Replacement Buy) = (2/2/13 – 8) = 1/25/13

Scottrade's Gain/Loss & Tax Center (GLTC) began utilizing the Tacking Method starting January 1, 2013, at which time the GLTC converted wash sale Holding Date calculation logic from Date Replacement to the Tacking Method. As a result, wash sales triggered after January 1, 2013 will utilize the Tacking Method; wash sales trigger before Jan 1st 2013 will continue to use Date Replacement. For any questions about wash sales or cost basis, please refer to the available Scottrade Knowledge Center resources, or contact your local Scottrade branch office.

Scottrade does not provide tax advice. The material provided in this article is for informational purposes only and Scottrade is not responsible for any errors or omissions. Contribution and income limits are subject to change without notice. Please consult your tax or legal advisor(s) for questions concerning your personal tax or financial situation.