Recently, a Charles Schwab client shared their frustration with how the brokerage classifies certain transactions as wash sales.
In their case, they sold shares of SCHB for tax loss harvesting purposes, which included all the shares they had acquired in the past year, and had not purchased any new shares since the sale.
However, several of their transactions were flagged as wash sales by Charles Schwab, resulting in disallowed losses.
What’s the Wash Sale Rule on Charles Schwab?
The issue may have been related to tax lot reporting, which Schwab typically uses an average cost method on the entire position.
For example, if an investor makes five purchases of 200 shares at different prices over time, they end up with a position of 1,000 shares at an average price of X.
When a portion of the position is sold, Schwab uses FIFO accounting to adjust the cost basis, but tracks the time from the most recent purchase.
This can result in a wash sale if the investor buys back shares of the same security within 30 days.
Charles Schwab Incorrectly Reports Wash Sale Losses
Moving forward, this is what you need to do to avoid having Charles Schwab incorrectly report wash sale losses.
Change the cost basis election in your Schwab account to Highest in, first out (HIFO) to avoid wash sales. HIFO is a good way to build a position reflected with average cost but allocates sales to the highest cost basis shares first.
This strategy can minimize realized gains, maximize realized losses, and scale down the cost basis as trades are unwound, improving risk management.
However, tracking trade dates is necessary, or investors will need to look at transactions in their account manually.
You should also contact a Charles Schwab customer representative and have them look at your account. Sometimes incorrect reporting of wash sales can happen.
In my opinion, it seems that Schwab calculates wash sales on a per-partial trade basis rather than using an average value. This could create confusion.