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Comment by fis | Hacker News Reader

How is it possible for the tax liability to exceed the profit? The article mentions wash sales, but it doesn't explain what sequence of such trades can cause this situation.

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You buy security X for $1000 and sell it for $100. You immediately repurchase security X for $100 and sell it for $1100.

You made a net profit of $100 but are taxed on $1000 because you can't write off the $900 loss.

This is not how it works under the wash sale rule. In your example, the $900 loss would be added to the cost base when doing the second purchase. Because of that, the sell at $1100 will have a cost base of $1000.

The loss of the wash sale is added to the basis of the next purchase. You would still be taxed on a gain of $100 in that scenario.

The nasty case is if you buy X at $100, sell at $1000, buy at $1000, wash sell at $100, then buy at $100.

You have $900 in gains according to the wash sale rule but no actual gains. Your basis in X is $1000, so you would have no gain if you sold at the current price, but if you hold it until the end of the tax year, then you owe taxes on $900 despite not making anything.

Would it be safer to close out out potential wash-sale positions by end of November, instead of end of year?

I imagine a situation where you sell everything of Stock A on Dec 20 realizing all losses, and then mistakenly rebuy back on Jan 10. Now all your loss for previous year is disallowed and you have no way to fix it? Even if you immediately sell the loss would count for the current tax year, and not previous tax year, right?

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