Anyone know about how wash sale laws apply to state taxes? I had a number of wash sales in 2020, and it all worked out on my federal taxes since the disallowed loss is equal to the amount that they lowered my cost basis of the next trade. However, for my state taxes, Turbo Tax allowed my wash sale losses to counter my gains. This made my state taxes much lower than I would have thought. Is this some kind of loophole that states don't care about wash sales and let you take the double benefit of having both the lower cost basis and allowing the loss?

I am in PA, and I searched PA law online and couldn't find anything about wash sales. It seems to only come up in federal law.

Someone would need a reason to ask. there's no way to know how much you lost at a glance.
Kinda like a big poker win I imagine

i actually didn't lose anything. My wash sales resulted from profitable trades, but some were marked as wash sales because I selected the LIFO method of accounting in my brokerage account and traded the same stock multiple times per day at lower prices each trade. I often trade the same stock over and over in the same day. I buy the stock, wait for it to go up a bit, sell for profit, wait for next dip and repeat. Doing it this way I can have 5 transactions that all made a profit, but the buy-in price was lower each time. Using the LIFO method, my brokerage firm will match the last in (my last buy, which was my lowest $ buy) with the first out (my first sell, which was my highest $ sell). By the time it gets to the last few trades, we are matching the higher buys with the lower sells, and this causes some of the 5 transactions (often 2-3 of them) to be listed as losses. And since I bought/sold 5 times in a row it triggers wash sales. Due to wash sale rules, the disallowed loss is added to the cost basis of the next buy, so everything evens out and I am made whole, at least for federal tax purposes and for the gains I got from each trade.

When I did my taxes for 2020, I auto-imported from my brokerage account into Turbo Tax. Federal taxes were as I expected, but I owed the state 75% LESS than I expected to owe them. When checking the numbers on the state forms, it appeared as though PA did not disallow the wash sale losses like the fed had. When I asked a tax expert, they said the software was right. If anyone happens to be a tax expert and can weigh in I would appreciate it. Probably a reach to even ask this on JSP, but was just curious if anyone else knew anything about wash sales for state taxes or has had a similar experience. Also, if I actually found a tax loophole I wanted to share it with people! I am saving a lot of money on my state taxes for 2020, and will continue to take advantage of this if it is in fact a loophole and not a mistake by the software.

This post was edited by birdman5 on Apr 27 2021 11:08am