Question on Wash Sale

That is not correct. You are free to buy the stock anytime you wish. The wash sale rules only prevent you from claiming the loss on the sale at the time of the sale. Your loss is not "lost", it is simply postponed.

Other than your spouse on a MFJ return, I can think of no other individual whose purchase would preclude you from taking the full loss on your return.

That's a good question.

Don EA in Upstate NY

But he specifically said "to take a tax loss". With that goal in mind, you can't buy it back within the 30 day window.

You can't take a loss on any related party transaction. There is a list on page 50 of IRS Pub 550 (the 2010 version) under the heading Related Party Transactions..

A point of clarification since OP specifically mentioned IRAs. If you sell for a loss in a taxable account and purchase replacement shares within the wash sale window the loss is truly "lost." There's no basis to add the deferred loss to.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

So in this case is your best bet to sell the shares in the IRA account and buy them back in a taxable account, so as to disallow the loss in the IRA (not that it matters anyway) and transfer it to the taxable account?

Since the related party is buying _back_ the stock, I think the case is where OP sells the stock in the market, and someone else buys it back later (perhaps the next day). There are no related party transactions involved.

In other contexts (so perhaps completely unrelated to this), similar language refers to anybody over whose investments the person in question has sufficient influence.

If OP sells it for the tax loss, can OP buy it in a trust fund (owned by OP's child, with OP as trustee) without triggering the wash sale rule?

Seth

Do you agree that if a wash sale happens inside the IRA (which is already a unrecognized loss) and the repurchase happens outside, then basis (to the extent of the sale washed) is created out of thin air because the application of section 1094(d) is mandatory and RR 2008-5 implies such an outcome for the reverse direction case?

Well, you can, but not legally keep the deduction too. ___ Stu

In a related party transaction the related party is treated as the principal for tax purposes. Since a wash sale involves a taxpayer buying and selling the same stock within 30 days, a related party doing one or the other would be treated as if the taxpayer did it. ___ Stu

Since assets in an IRA have a basis of zero, this might be a risky move. ___ Stu

Not necessarily so. If you read the section in Pub. 550 on related party transactions, you can have a related party transaction with open market stock sales where there is a "prearranged plan" for one party to sell and the other to buy. While I imagine it might be difficult for the IRS to prove the existence of a prearranged plan, difficulty doesn't equate with allowed.

Ira Smilovitz Leonia, NJ

Wait a second: Just because the gain or loss inside an IRA isn't recognized doesn't mean that assets in an IRA lack basis. The taxpayer controlling the IRA may not have a basis on a transactional level but the IRA trust account itself does.

How many people have IRAs with non-zero basis? The hassle of making a non-deductible contribution and tracking its share of the account over the long life of an IRA always seemed to me to be way more hassle than it's worth.

R's, John

I probably should have added to my reply, that I was speaking of a prearranged plan to have a related party buy back the stock within the

61 day window. The related party rules disallowing a loss (Sec. 267) have been applied by the courts to the wash sale rule (Sec. 1091) when the transactions are deemed to have been prearranged. The court collapsed the transactions to being by the same party. This is not the case when a related party buys back the same securities within the 61 day window merely as coincidence.

The reference I gave to IRS Pub 550 is where you have the list of related parties referred to in Sec. 267 of the IRC.

Alot of people, including those who had an AGI too high to make a deductible contribution or (before the limit was removed) a Roth-IRA contribution.

Just because a certain set of circumstances doesn't apply to you doesn't mean that someone else isn't affected.

I think we have gotten off track here, mixing the word Basis for purposes of calculating capital gains, with Basis (of an IRA) meaning the unrecovered non-deductible portion of an IRA.

When stock is sold in an IRA for less than it was bought, that does not generate any capital gain or loss in the IRA, so does not enter into wash sale calculations.

IRS counsel who wrote the revenue ruling that selling at a loss in your personal account and within +/- 30 days buying the stock in an IRA is a wash sale did not even mention the reverse case I listed in the previous paragraph.

We have gotten way off the reservation to what was a simple question.... hopefully already answered.

Your new query fails in your first sentence. There is no such thing as a wash sale inside an IRA. Sec. 1091 of the IRC applies to sales of securities at a loss from a taxable account. It prevents recognition of a realized loss if you violate the wash rule's 61 day period by repurchasing the securities. Rev Rul 2008-05 citing two court cases, extended the wash rule to repurchasing those securities in an IRA or Roth IRA. In addition, if you do use your IRA or Roth IRA to repurchase the securities the basis adjustment in Sec. 1091(d) is disallowed and is lost forever.

Personally, I believe that any realized loss in a taxable account would not be recognized under the wash rule (Sec. 1091) if the taxpayer violates the 61 day window using any of his/her retirement accounts or any other entity in which he/she is a majority owner to repurchase the same asset or substantially the same asset. I also believe the same would hold true if under a prearranged agreement a related party as identified in Sec. 267 repurchases the same or substantially the same asset.

RR 2008-5 says that what happens inside an IRA does affect wash sale status.

I agree that it did not. However, what it does say is that an IRA is part of the controlled entities of a taxpayer and what happens inside the IRA does invoke wash sale rules of section 1094. I see nothing that says that the notice implies that the flow of application of the section is in one direction only. Therefore, a sale within an IRA at a loss and a repurchase outside of it is also a wash sale and the repurchase is subject to the basis adjustment of 1094(d) -- because the actual language of the text used only requires a "washed loss" and doesn't care about (non-existent IRA) "basis" in the washed transaction. I don't see that it matters that the wash sale is already a non-recognized transaction (due to being inside an IRA) because this RR says that we DO recognize it for purposes of applying section 1094.

If I'm wrong, show me where I'm wrong while the RR remains correct. [Personally, I think that this RR is faulty, with my view above demonstrating such.]

Excuse me, but where in section 1091(a) does it say that the transacton must source from a "taxable account?" It says that any loss on sale where there's a repurchase within 30 days (before or after), no loss is recognized. It doesn't say that the loss must be a recognized loss without application of section 1091 itself. It says "any loss," not "recognized loss (notwithstanding this section)."

The reason why the RR appears to state no basis adjustment is that IRA accounts don't carry basis for the taxpayer based on transactions inside the account. The transaction itself can (and should) have a basis adjustment, but the IRA's "black box" behavior makes this irrevelant. However, with the reverse condition, a loss inside an IRA and repurchase outside, there is still a loss (already not recognized) on the sale of securities that gets washed, and the repurchase outside does carry basis. Application of section 1091(d) is mandatory.

Prior to RR 2008-5, I would not even have considered an IRA of being capable of washing a sale. It's "black box" characteristic would preclude such. However, as this RR says that it can, I see nothing that shows that a sale at a loss inside an IRA can't be washed by an outside repurchase by the taxpayer controlling both accounts.