RSU sale-to-cover and ESPP losses: Are they wash sales? If so, recoverable? (2024)

My company performed a sale-to-cover when some RSUs vested. It took a few days to settle, and there was a ST loss of $1000 on the sale. Seven days later, an ISO same-day sale of the same stock was made (reports as compensation since it's disqualified), with a STG = 0. Did the ISO same-day sale make the RSU sale-to-cover a wash sale? If so, can the loss be recovered by the ISO same-day sale, or is the RSU loss unrecoverable? (Pub 550, Wash Sales example 2 on p 56 confuses me because it doesn't describe carrying forward the loss; it simply says "you cannot deduct your loss".) If it can be recovered, how does that work since the ISO basis is included in compensation on the W2?

In another case, an ESPP sale couldn't be sold for several months after an IPO. It was eventually sold at a ST loss of $3000, and there was an ISO same-day sale on the same calendar date. Is the ESPP loss a wash sale? If so, can the loss be recovered by the ISO same-day sale that happened to occur on the same calendar date, or is the loss unrecoverable? (same confusion over Pub 550)

‎March 9, 20235:14 PM

As to your first question, it depends. Need some clarification regarding the "ISO same day sale." Does this mean that the incentive stock option was exercised (purchased) and then sold on the same day. If yes, then it appears the RSU loss would be a wash sale. The wash sale covers the period 30 days before the sale and 30 days after the sale. The starting point for wash sales is with the sale that results in a loss. Thus, we start with the sale of your RSUs which were sold at a loss. Was this loss allowed or disallowed per the wash sale rule? In your scenario, the RSU shares were sold at a loss; however, four days earlier, ISO shares were purchased. The ISO purchase happened within 30 days of the RSU sale. Thus, the wash sale rule is triggered.

As to your second question, yes, because when RSUs vest, that is the equivalent of a purchase. Because the RSUs were sold for a loss, the subsequent purchase--four days later--of the same security through the exercise of the ISO triggered the wash sale rule. You are correct in that the loss gets added to the cost basis of the ISO shares. And yes, the RSU loss is disallowed.

@bluecloud33

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A wash sale is triggered by a purchase of identical security.

If you are dealing only with SELLs , there is no wash sale.

@bluecloud33

The purchase of the identical security was the ISO same-day sale (exercise and sale on same day) in each case. Or are you saying that an exercise is not a purchase?

@fanfare

Maybe my use of the term "same-day sale" for an ISO is not correct. But I meant a purchase and sale on the same day.

In my first situation, this happened 7 days after the RSU sale. In my second situation, this just happened to occur on the same day as the ESPP.

I missed that point.

according to the example you cited, there is a wash sale.

but the acquired stock was immediately sold.

the wash sale shares and the acquired shares go together for loss accounting purposes.

since you sold the triggering shares, your disallowed loss is recovered.

the net effect is the same whether you apply the wash sale rule or you ignore the wash sale rule.

if you want to show a disallowed loss (Code W)

add the loss to the basis of the triggering acquired shares.

It is an unnecessary complication, IMO.

@bluecloud33

Thanks for updating your response!

The basis of each disqualified ISO is reported as ordinary income on the W2. So for each ISO same-day sale, do I keep its compensation (basis) as reported on the W2, enter the STG of 0 as reported on the 1099, then click the button to "adjust for another reason" at the end of the turbotax questions for that particular sale and put the disqualified wash there?

Another fine point - does the wash sale on the RSU sell-to-cover actually need to be adjusted in the released RSUs (that happened on the same day) or on the ISO same-day sale that occurred 7 days later? If it's the released RSUs, I guess the description of how to eventually adjust for the wash sale would be the same as what I wrote above, but it would be in the future when I sell those RSUs.

Why does example 2 on page 56 of Pub 550 (https://www.irs.gov/pub/irs-pdf/p550.pdf) not state that the wash sale for original ISOs can have their basis shifted to the replacement ISO shares? Was that just an oversight of the IRS, or was it because the first sale was also an ISO, but in my case the first sale isn't an ISO so the example doesn't hold? Example 1 on this page is very clear, but example 2 is either incomplete or is an exception to shifting the basis to the replacement shares.

@fanfare

My company performed a sale-to-cover when some RSUs vested. It took a few days to settle, and there was a ST loss of $1000 on the sale. Seven days later, an ISO same-day sale of the same stock was made (reports as compensation since it's disqualified), with a STG = 0. Did the ISO same-day sale make the RSU sale-to-cover a wash sale? If so, can the loss be recovered by the ISO same-day sale, or is the RSU loss unrecoverable? (Pub 550, Wash Sales example 2 on p 56 confuses me because it doesn't describe carrying forward the loss; it simply says "you cannot deduct your loss".) If it can be recovered, how does that work since the ISO basis is included in compensation on the W2?

In another case, an ESPP sale couldn't be sold for several months after an IPO. It was eventually sold at a ST loss of $3000, and there was an ISO same-day sale on the same calendar date. Is the ESPP loss a wash sale? If so, can the loss be recovered by the ISO same-day sale that happened to occur on the same calendar date, or is the loss unrecoverable?

For the RSU X shares were sold at a loss. You "purchased" Y shares on the ISO within the wash sale period. The loss is disallowed to the extent the number of Y shares purchased equaled or exceeded the number of X shares. Example 1 - number of X shares sold 70. number of Y shares purchased 100. entire loss is a wash sale but the loss only is added to the tax basis of 70 of those Y shares. Example 2 - same number of X shares sold.

number of Y shares purchased 50. there is a wash sale only on 50 of the X shares sold (50/70*1000) so that loss gets added to the 50 Y shares. when the Y shares are sold you may need to adjust the basis . when reporting on 8949 you'll need to use code B to report incorrect basis an column G for the correction.

as to the ESPP sold at a loss (you use the sales date), if identical securities were purchased within 31 days before or after the sale you have a wash sale to the extent the same number of shares were purchased.

this can get complicated if some of the purchases were already adjusted for losses on other wash sales.

I think I follow you. But I realize that I summarized the RSU case incorrectly, and I'm not sure that it was a wash sale. Please consider.

The ISO same-day sale actually occurred 4 days before the RSU release/sell-to-cover with the ST loss of $1000. Since the ISO event was same-day, I didn't hold any of those shares when the RSU event occurred. So the ISO event couldn't have caused the RSU event to be a wash sale, correct? Or is it a wash sale and the loss is reported with the ISO same-day sale?

And just to make sure I understand correctly, if the ISO same-day sale had occurred 4 days after the RSU event rather than before, it technically would have triggered a wash sale, so the wash loss is reported with the ISO same-day sale, correct?

By the way, the ISO same-day sale wasn't involved in any other wash sales, so thankfully it didn't get more complicated:)

@Mike9241@fanfare

When you say "Since the ISO event was same day," if you mean that you exercised your option to purchase shares and then sold those shares at a loss, then yes, the ISO loss would have been a wash sale because of the RSU vesting. The IRS considers RSU vesting as the functional equivalent of a purchase. Thus, your ISO event was a purchase and a sale at a loss, and then your RSU event was a purchase followed by a sale at a loss. Thus, the ISO loss would be characterized as a wash sale and the loss would be disallowed.

Regarding your second question, if the ISO purchase and sale occurred four days after the RSU vesting, and the ISO sale resulted in a loss, then the RSU vesting would also trigger the wash sale rule. In this scenario, the ISO loss would be disallowed.

@bluecloud33

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Hi @GeorgeM777,

Let me clarify the first question. The ISO same-day sale was not at a loss - all ordinary income, no ST gain or loss. Four days later, an RSU release/sell-to-cover had a $1000 loss. Since none of the ISO same-day sale shares were owned at the time of the RSU sell-to-cover loss, was the RSU loss a wash sale?

To clarify the second question - assume the RSU release/sell-to-cover with a $1000 loss happened first. Then four days later, an ISO same-day sale (again all ordinary income, no ST gain or loss) happens. In this case, does the RSU sell-to-cover get reported as a wash sale, then the ISO same-day sale needs an adjustment of $-1000 since it's within the 30-day window?

These events happened in different brokerage accounts, so the brokers don't report any wash sales, but I am sure the IRS knows:)

As to your first question, it depends. Need some clarification regarding the "ISO same day sale." Does this mean that the incentive stock option was exercised (purchased) and then sold on the same day. If yes, then it appears the RSU loss would be a wash sale. The wash sale covers the period 30 days before the sale and 30 days after the sale. The starting point for wash sales is with the sale that results in a loss. Thus, we start with the sale of your RSUs which were sold at a loss. Was this loss allowed or disallowed per the wash sale rule? In your scenario, the RSU shares were sold at a loss; however, four days earlier, ISO shares were purchased. The ISO purchase happened within 30 days of the RSU sale. Thus, the wash sale rule is triggered.

As to your second question, yes, because when RSUs vest, that is the equivalent of a purchase. Because the RSUs were sold for a loss, the subsequent purchase--four days later--of the same security through the exercise of the ISO triggered the wash sale rule. You are correct in that the loss gets added to the cost basis of the ISO shares. And yes, the RSU loss is disallowed.

@bluecloud33

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