Capital Gains - IRA Wash Rule

If you sell a stock in a taxable account at a loss and then buy it back in an IRA account within 30 days, are you allowed to claim the loss?

Reply to
kupchik
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No, according to the IRS. I don't know if it's been litigated, but I don't think so.

Reply to
Phil Marti

I thought we had a definitive answer back in December:

The IRS yesterday issued an advance copy of Rev. Rul. 2008-5, 2008-3 I.R.B. ___ (1/22/08), which applies the § 1091 wash sale rules where a taxpayer sells stock or securities at a loss and then causes her IRA to purchase substantially identical stock or securities within thirty days. As a result, the loss on the sale is disallowed and the taxpayer's basis in the IRA is not increased.

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a copy of the ruling. Good FAQ item, BTW. Joe
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Reply to
joetaxpayer

That's the "IRS" part of my response to OP.

Revenue Rulings are given a lot of weight, but they're not definitive. They can still be challenged in court, and AFAIK this issue hasn't had its day in court.

This question has been buzzing around for years, and I'm curious why it took IRS so long to come out with an official position. It could be because there were hotter issues to be addressed. It could be because they weren't really comfortable with the position.

In any event, while it's unusual for IRS positions to be reversed by the courts, it's hardly unheard of.

Reply to
Phil Marti

I'd say that such could be a bad ruling. In general, a taxpayer and his IRA are separate (but related) entities, especially for ownership purposes (although one owns the other). The next thing we know, the IRS will issue a ruling with regard to partnerships (or S-corps) held by the same owner where one PS sells and another buys - thus disallowing the loss for the partner. What a mess that could be - as Schedule K-1's only list dollar amounts, not what was sold or when during the year.

Reply to
D. Stussy

But the ruling is consistent with the spirit and intent of the wash sale rule. The purpose of the rule is to prevent taxpayers from turning paper losses into realized losses, and thus reducing their tax, with little risk of missing an increase in the security's value. Selling outside the IRA and then buying inside the IRA would be a pretty effective way of doing this, although also it has the effect of turning future capital gains into future ordinary income when you withdraw from the IRA.

I could definitely see why they'd want to prohibit this in the case of Roth IRAs. You'd get to realize the loss, but then repurchase the security and never pay tax on the subsequent growth.

Reply to
Barry Margolin

Agreed, but applying the rule to the taxable sale/IRA purchase scenario enriches the gov't while in a taxable/taxable scenario Uncle Sugar just breaks even. In the latter, the loss is merely deferred, not eliminated. Since the IRA can make no tax benefit of the loss, it disappears.

It seems to me that giving the IRA a basis (as in after-tax IRA basis) equal to the disallowed loss would be more in the spirit and intent of the statute.

Reply to
Phil Marti

Barry Margolin wrote in news: snipped-for-privacy@newsgroups.comcast.net:

So I sold with a gain that was much smaller because of the current slump, and purchased into a Roth. For both 2007 and 2008. Since I didn't have a loss, it is legal?

Reply to
Han

There's also the fact that selling TO the IRA is already a prohibited transaction. I really don't like this because these (the person and his IRA) are two separate entities for ownership purposes. In a TRUE wash sale, it's the SAME entity that repurchases the security that was sold. I certainly hope that this gets struck down soon, but Mr. Marti's response is a reasonable compromise.

Reply to
D. Stussy

I like Phil's comment as well. However, Stussy's comment could be used to support the position that a wash transaction was effectively the same as a sale to the IRA which disqualified that retirment account.

Related party rules have long been interpreted as applying to wash sale rules. I don't see the subject Rev Rul as breaking new ground.

Reply to
Bill Brown

Do the code or regulations include other related party transaction in the definition of a wash sale? If it's there I couldn't find it. I suppose it could be argued that the IRS position on wash sales and IRAs is contrary to the statute and as a result unenforceable.

One perhaps interesting issue: section 1091 talks about "the taxpayer." Since an IRA is not a tax paying entity, can it be argued that the IRA is not either "the taxpayer" or "a taxpayer"?

Stu

Reply to
Stuart Bronstein

Sure. The wash sale rule doesn't prohibit selling in a regular account and buying in an IRA, it just prevents you from taking the loss off your taxes for that year. If you sell at a gain, you INCREASE your tax for that year, and the feds will take it happily.

Reply to
Barry Margolin

This doesn't involve the emotional other issue. A gain, however small, is not a wash sale.

Reply to
DF2

DF2 wrote in news: snipped-for-privacy@4ax.com:

Thanks DF2 and Barry. That was my understanding too. Now I have to pay estimated taxes on the gain, I think ...

Reply to
Han

Han wrote in news:Xns9A7BD6F7D116Fikkezelf@

130.81.64.196:

Well, darn it. I thought I still had a gain on the sale of Magellan shares, but not apparently after all calculations done properly. It is a loss.

So could you please recapitulate what my situation is now?

These were mechanically 4 transfers from a single joint taxable account at Fidelity into 2 separate individual Roth IRA accounts with the same SS#s as on the joint account for 2007 and 2008 contributions for taxpayer and spouse.

Joint account Magellan shares were bought over the years. Sold on 1/22/08 with a ~$450 loss

Proceeds were transferred to Roth IRAs (spouse and me) for 2007 and 2008 contributions. Purchased Magellan shares immediately using the Roth transferred proceeds. (yeah, maybe not so smart, but I'm hoping the investment will pay off eventually).

Questions: I can or cannot report the loss for 2008 taxes? The basis of these just purchased shares in the Roth accounts does not really matter, right?

Thanks in advance!

Reply to
Han

I don't think you can.

Right.

Reply to
Barry Margolin

Barry Margolin wrote in news: snipped-for-privacy@newsgroups.comcast.net:

Thanks, Barry!

Reply to
Han

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