If you sell a position at a loss and purchase that position again 30 days before or 30 days after the sell, the IRS considers this a “wash sale” and the investor is not allowed to take the realized loss.

To maintain accurate cost basis in Schwab’s PortfolioCenter, you need to 1) adjust the cost basis of the new lot by the amount of the loss disallowed, and 2) add the time you held the original security to the new trade lot, preventing the short-term loss later.

A partial wash sale occurs when a client buys back only part of the original position.  Typically, partial wash sales occur unintentionally when the client receives a reinvested dividend 30-days before or 30-days after the sell of the security.  You can avoid partial wash sales by:

  • turning off automatic dividend reinvestment;
  • switching to FIFO (rather than High Cost or beneficial tax); and/or
  • using third-party trade planning software with the sophistication to help you avoid wash sales.

Partial wash sales impact both the open and closed positions.  You will see the open position on your cost basis reconciliation report.  You will see closed position on the realized gain/loss report.

To process a wash sale, you need to:

  • Correct cost basis on the current open positions to ensure your cost basis reconciles.
  • Correct the realized gains/loss portion of the wash sales.  If the dollar amount difference is very small (which it often is), you may choose skip this step. However, if you provide your clients with the PortfolioCenter realized gain/loss reports for tax reporting, processing wash sales makes your reports more accurate.

There are many complex scenarios for handling partial wash sales and each case can be different. You should consult a tax professional to validate any realized gain adjustments before adjusting cost basis data in PortfolioCenter.  And, as of this writing, PortfolioCenter cannot be adjusted for some types of wash sales .

For the step-by-step process, see Handling Partial Wash Sales

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