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wash sales and day trading
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great question! it can be a confusing for sure -- but here's a great example i've adapted to your scenario: as a day trader, you buy 100 shares of lmno at $100, then after a large drop the same day, you sell all 10 shares at $90 for a loss of $1,000. later in the afternoon, you bought another 100 shares at $92 and resold them an hour later at $97 (a $500 profit), closing out your position for the day. the second trade had a profit of $500, so you had a net loss of $500 (the $1,000 loss plus the $500 profit).  here’s how this works out tax-wise: the irs first disallows the $1,000 loss and lets you show only a profit of $500 for the first trade (since it was a wash). but it lets you add the $1,000 loss to the basis of your replacement shares. so instead of spending $9,200 (100 shares times $92), for tax purposes, you spent $10,200 ($9,200 plus $1,000), which means that the second trade is what caused you to lose the $500 that you added back (100 x $97 = $9,700 minus the 100 x $102 = $10,200, netting $500 loss). on a net basis, you get to record your loss, it just gets recorded on the second trade. the basis addition lets you work off your wash-sale losses eventually, and in your case, on day 3 you would recognize a $500 final net loss for tax purposes since you exited your position. caveat: unless you re-enter lmno within 30 days later (at which point it would be another wash and the basis would shift again). source: http://www.dummies.com/personal-finance/investing/day-trading/understand-the-irs-wash-sale-rule-when-day-trading/
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