IRS Issues Revenue Ruling on Wash Sales (IRA & Roth IRA Buys Substantially Identical Securities)

This issue comes up every year. The IRS has now addressed it in Revenue Ruling 2008-05

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Anyone care to guess which way they came down? Hint: See Security First National Bank of Los Angeles, 28 BTA 289 (1933). yes... that is 1933.

Reply to
Alan
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THAT IS UNBELIEVABLE !

Under § 408(e)(1), generally, an individual retirement account is exempt from taxation.

Under §§ 408 and 72, any amount distributed from an individual retirement account is includible in the distributee's gross income for the year of the distribution unless it is properly allocable to the account owner's basis in the account. Under § 408A, a similar income inclusion rule applies to nonqualified distributions from a Roth IRA. An individual has basis in an individual retirement account only to the extent that the account includes nondeductible contributions.

Section 1091(a) provides that in the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under § 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business.

Section 1091(d) provides rules for determining the basis of stock or securities the acquisition of which resulted in the nondeductibility under § 1091 (or corresponding provisions of prior law) of the loss from the sale or other disposition of substantially identical stock or securities.

NOW GET THIS!

"The loss on the Sale of stock is disallowed under § 1091. A's basis in the individual retirement account or Roth IRA is not increased by virtue of § 1091(d). "

Does this mean what I think it means? That the loss is FOREVER?

If so,

  1. That defies COMMON SENSE; it's not what happens if the purchase of the replacement stock is outside of an IRA.

Cheers,

WDK

Reply to
KEBSCHULLW

The IRA account is not a capital asset, so cost basis of an IRA is not applicable. IRA Tax basis, meaning unrecoverd nondeductible contributions, share the word basis, but that's all.

Is it common sense to say that a parent who sells his rental property at FMV at a loss to Cousin Alice gets to claim that loss, but if sold at FMV/loss to Junior, that loss flys away, forever?

Reply to
Arthur Kamlet

That is exactly why the wash sale rule shold only apply to transactions in a market account. What goes on in a IRA account is irrelevant when it comes to the wash sale rule.

Cheers.

And not only that, if there was a gain on the property it will be taxed at the regular tax rate.

Cheers,

WDK

Reply to
KEBSCHULLW

,

I'm not sure, but I think you may have missed the point the IRS has based its ruling on. The ruling is saying that an IRA, a trust established for the sole benefit of the taxpayer or his beneficiaries, that acquires substantially identical securities is merely a refinement of title and is disregarded for purposes of Sec. 1091. This is not unexpected as many of us have said that the IRS would probably one day use the related party rules to disallow any loss in one's tax account if the IRA violated the

61 day rule.

In addition, the ruling is informing all of us taxpayers that if one does buy substantially identical securities in one's IRA within the requisite time period, then the disallowed loss in your taxable account is no longer available to you as you have effectively moved the asset into a tax-deferred trust. This is not the first time tax law has disallowed losses "forever." Today, if a taxpayer sells an asset to a related party at a loss, the loss is disallowed and is lost forever. Neither the seller nor the buyer of a related party loss transaction gets the to take the loss.

Reply to
Alan

However, the related-party buyer can exclude the disallowed loss from subsequent gain, unless the disallowed loss was subject to wash sale rules. No such luck if sold at a loss. See IRS Pub 550.

Side thought: wouldn't it be interesting to have list of losses that, for tax purposes, are disallowed or excluded or unrecognized forever. Such as AMT exclusion items, basis step-up/step-down at death, capital loss carryover at death, etc.

-Mark Bole

Reply to
Mark Bole

What if you lose money on a stock trade in your IRA, and buy back the stock in a taxable account? Is your basis raised by the IRA's loss?

Seth

Reply to
Seth

Your concerned relatives have you committed. Why would anyone sell for a loss that provides no tax benefit just to buy back the same stock?

To answer your question, no, there's no adjustment to basis in the taxable account.

Reply to
Phil Marti

Perhaps one has to sell off part of their portfolio to take a RMD from an IRA and wishes to reinvest and maintain the same portfolio in a taxable account (after taxes are withheld of course). If one is invested for the long term and doesn't try to "time" the market, it is very possible that some assets may have gains and some may have losses, particulary if one has been reinvesting all dividends and gains.

I hope I won't get committed if such something like that happens .

Reply to
Ernie Klein

So why not just move the stock to the taxable account and skip the sale & purchase commissions? Perhaps not rising to the level of legal incompetence, but definitely due for a talking to.

Reply to
Phil Marti

I think Seth raised a very good point. We don't have clients who always make the rational decision and only tell us about it after the fact.

Now then, IF all clients would just call before they do something,.......~

Christmas ChEAr$, Harlan

Reply to
Harlan Lunsford

"Harlan Lunsford" wrote

There are some things my clients do that I never want to know about.

As the saying goes.....I'll catch it on 60 Minutes.

Reply to
Paul Thomas, CPA

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