On my web site I tried to create the most complete guidance available anywhere on the wash sale rule, and that meant covering how the rule applies to short sales. When I researched the subject, it seemed to me that the rules are in such a state of confusion that it's difficult in some cases to know what the rule really is. My page on how the wash sale rule applies to short sales appears here:
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I think the confusion arises from a failure to recognize that short sales can function in two ways. You can sell short against the box and cover with the stock you own, or you can sell short and cover with shares you don't own. These two transactions should be analyzed differently because in the first case your loss arises from a long position, and therefore should be considered a wash if you make a replacement purchase, while in the second case your loss stems from a short position, and should become a wash if you replace your short position with a subsequent sale. The regulation for the wash sale rule gets part of the way there with this distinction but doesn't follow through. A subsequent change in the Internal Revenue Code partly clarifies and partly confuses the rule, and the description in IRS Publication 550 seems to me incorrect.
The situation you describe in example 1 involves a loss from a short position, because you are buying new shares to cover. In my view, the short sale rule shouldn't apply if you subsequently go long, as you do in the second round trip, because you aren't replacing the position that produced the loss. Whether the IRS would understand this logic and follow it is another question. If it were my return, I would take the position the wash sale rule doesn't apply, but I would be prepared for the possibility the IRS will disagree in the unlikely event they became aware of the situation.
Example 2 is a straightforward example of a wash sale, except it appears you made an error on the dates. I'm assuming you intended the purchase to be before the sale so that there was a loss from a long position. In that case it's clear that the wash sale rule would apply.
Kaye Thomas, author
Fairmark Press Tax Guide for Investors
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