Calculating Adjusted Holding Period

Related statutes and regulations are currently ambiguous with regard to determining adjusted holding period under the wash sale rules.   The issue is whether short or long term capital gains treatment upon disposal of wash sale adjusted shares is determined (a) by computing actual days held for the original shares plus any and all instances of replacement shares (referred to as the ‘holding period’ approach), or (b) using the acquisition date of the originally disallowed loss as the adjusted acquisition date for any and all instances of replacement shares (referred to as the ‘holding date’ approach).

Silver believes the holding period approach to be highly problematic and open to abuse, while the holding date approach is far simpler, more consistent with the intent of the wash sales rules, and cannot be similarly abused.

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Shares Acquired Before Acquisition of Shares Sold

Consider the following simple example:  An investor purchases 100 shares of stock on Jan 3, 2011, then another 100 shares of the same stock on Jan 18, 2011.  On Jan 31, 2011, the investor sells the shares acquired on Jan 18 (via specific identification) at a loss.  Do the shares acquired on Jan 3 constitute replacement shares thereby disallowing the loss?

Silver’s position (as shared by Kaye Thomas of Fairmark Press on page 6 of his comments in response to IRS Notice 2009-17 and again in his comments in response to the proposed regulations, here) is that this sequence of activity does not constitute a wash sale since the Jan 3 shares were acquired before the Jan 18 acquisition date of the shares sold on Jan 31 and therefore cannot be considered replacement shares.  More generally, shares acquired before the acquisition of shares sold should be disregarded when applying the wash sale rule.

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