Wash Sale and IRA question

Are you also selling all shares of the fund in the taxable account? Then this should work. Basically, for purpose of applying the wash sale rule you treat your taxable and non-taxable accounts as a single portfolio.

Investopedia has a good article on this.

Isn't that where the reinvested dividend is above? Did you mean to change the conditions?

A wash sale involves selling securities at a loss and repurchasing identical or substantially identical securities within 30 days before or

30 days after the sale. You state that you want to sell securities in your taxable account at a loss and also sell securities in a qualified retirement account. There is no wash sale as you are not buying anything!

"the fund just made a capital gains distribution last week and while I took the proceeds in cash in the taxable account, the proceeds in the

401K were automatically reinvested"

There was a purchase that technically creates a potential wash sale. Although, I wonder how common it is for these to ever matter. Still, his proposal to sell all shares will clear up any issue.

I was only planning on selling some of the shares in the taxable by specific share ID - only selling the losers.

The reinvested dividend was in the IRA only, which I couldn't control.

The dividend in the taxable was paid into my bank account and was never used to repurchase any shares.

If I sold all of the IRA shares, I don't see why I can't use specific ID on the taxable shares to declare the full loss in the taxable.

Let me clarify. Both taxable and 401K hold mutual fund XYZ.

1) Dec 13: Dividend received in 401K automatically reinvested in XYZ. This is the purchase that concerns me. 2) Dec 13: Dividend received in taxable paid out as cash. Not reinvested. 3) Dec 17: All shares of XYZ are sold in 401K. 4) Dec 20: I'd like to sell most but not all of the shares of XYZ in my taxable at a loss.

Do I have a wash sale?

I'm hoping that because on Dec 20th, I would no longer own replacement shares. However, I am concerned about the purchase within the 401K on Dec 13th.

I hope this clarifies and I appreciate any responses.

Thanks.

Alan wrote in news:pv8va8$c6g$ snipped-for-privacy@dont-email.me:

I was always under the impression that when you have an automatic re-investment of distributions, for tax / holding period / basis purposes it's the same as buying a security (even though you didn't take a specific action). And don't you now have to account for every re-invested distribution after a sale (whereas in the past you could just use "various" as purchase date and net out all the long term/ short term shares)?

scott s. ..

Sorry I missed the fact about the reinvestment. If you sell the shares in the 401K PRIOR to your selling the shares in the taxable account, you would for sure not have a wash sale.

Some preparers might argue that regardless of what you do in the 401K, you do not have a wash sale. They might take that position by narrowly construing the 2008 Revenue Ruling (2008-5) only applies to IRAs and Roth IRAs. Personally, I would not feel comfortable taking that position as the ruling in 2008 does contain a statement that the ruling accounted for the fact that the issue related to a non-taxable trust. I do not see how the IRS would not apply it to other non-taxable trusts. That said, there is no formal IRS written position that I am aware of, that says the disallowance of the loss also applies to all other non-taxable trust accounts such as 401K, 403b, 857, etc.

When you have a wash sale, you can't declare the full loss unless you fully dispose of all positions in the taxable account. It doesn't matter which account the purchases were in.

If you're selling 1000 shares at a loss in the taxable account, and purchase 100 shares in the IRA, you can declare the full loss on 900 shares. The other 100 shares do not declare a loss.

Normally when you have a wash sale, the disallowed loss is added to the cost basis of the replacement lot (this is important when determining gain/loss for future sales). However, IRS Pub 550 says "except in case

4", which is when the replacements are in an IRA or Roth IRA, but doesn't say where the disallowed loss is allocated in that case. My guess is it would be distributed somehow to all the remaining shares in the taxable account, but should it be spread evenly, added to the oldest lot, or what?

The article at the link below on Fairmark.com cites Rev. Rul. 2008-5, which says that you lose the basis adjustment if you bought the replacement shares in an IRA. You can't apply the disallowed loss anywhere. You can never claim the loss.

Bob Sandler

Again, to review Purchase 7 shares of XYZ in IRA on Dec 13 through dividend reinvestment Sell all shares of XYZ in IRA on Dec 17 Sell 100 shares of XYZ in taxable through specific ID on Dec 20th.

The question is. If I have already disposed of all shares XYZ in another account when I sell the taxable shares, do I even have a wash sale since the replacement shares are already gone.

Alan and joetaxpayer, say I do not.

Barry, are you disagreeing and saying that I do have a wash sale anyway because of a purchase within the 30 day window?

I do not want to lose the loss permanently even if it means taking the loss next year after the 30 days are up so I am really trying to understand this.

Thanks

That's what I'm saying. For the purposes of determining whether you have a wash sale, you do not distinguish between the IRA and taxable accounts.

Yes, that's what you have to do -- wait at least 30 days after the dividend reinvestment before selling your shares in the non-taxable account. Then you don't have a wash sale.

But according to the matching rules described by Fairmark, the wash sale rule is applied chronologically so that the losses from 12/17 use up all of the replacement shares purchased on 12/13. Therefore there are no replacement shares from 12/13 left to be matched to 12/20 even if I don't sell all of the shares.

So Barry, I'm not understanding why you think I have a wash sale anyway.

A wash sale involves selling securities at a loss and repurchasing identical or substantially identical securities within 30 days before or

30 days after the sale. You state that you want to sell securities in your taxable account at a loss and also sell securities in a qualified retirement account. There is no wash sale as you are not buying anything! === Note that the sale has to be recognized. Sales inside an IRA (either type) are not recognized.

There is a PLR (I think it's a PLR) that says that a sale in a taxable account (i.e. recognized) and a buyback in a deferred account (i.e. IRA) does generate a wash. I disagree with this. However, I do agree with a Bureau of Tax Appeals (precursor to the Tax Court) case from the 1930s that says a wash is created if a taxpayer sells in one account and buys in another where both accounts are under his control regardless of entity type (and for corporations, a 50%+ shareholder was enough in the case).

The purchases were in the 401k when the distribution was reinvested.

The sale was outside the 401k.

You seem to be contradicting yourself. Did you mean to say that both accounts have to be taxable?

The purchases were in the 401k when the distribution was reinvested.

The sale was outside the 401k.

You seem to be contradicting yourself. Did you mean to say that both accounts have to be taxable? ====== No.

The sale has to be in a taxable account (thus recognized). The buyback, per the IRS PLR, doesn't. That's what I disagree with. In this situation, the loss isn't deferred but lost because the second entity will never recognize it if it's a retirement plan or IRA. IRC 1091(d) makes the "disallowance" a deferral, but assumes that the subsequent sale will be recognized (or itself washed).

The case from the 1930s involved a sale by one entity and a buyback by another where both taxable entities were within a "controlled group" i.e. substantially owned (at least 50%) by the same person.

I agree with your conclusion, but it may be on thinner ice than you think.

The page you cite discusses which purchased shares get matched to which losses. For the matching rules to apply to sales, one obvious requirement is that the sales be losses. You've now added that info here on the 12/17 401(k) sale - it wasn't in your previous post.

But it's still not clear (to me, at least) that this "loss" counts, because it is inside the 401(k). Thus it's not recognized, and thus the matching rules might not apply.

Look instead to the Fairmark page on replacement shares:

To have a wash sale, it's not enough to have purchased shares within 30 days of a recognized loss, those shares must also "replace" the shares sold.

Consider the following sequence, in a single taxable account:

1. 2016 Buy a share @ .
2. 12/13/18 Buy a share @ . (You now hold two shares.)
3. 12/17/18 Sell the #2 share @ . (Specific ID; One share left.)
4. 12/18/18 Buy a share @ . (You now hold two shares.)
5. 12/20/18 Sell the 2016 share @12 ( loss)

We clearly have a wash sale, but which is the replacement share? #2, bought 12/13, or #4 bought 12/18?

It would seem that the replacement share is the #4 share. The earlier #2 share was bought and sold (i.e. out of the picture) before transactions #4 and $5 took place. It never "replaced" the share sold

12/20.

Now, take the same example, except strike out #4. If that was the replacement share (and #2 was not), then now there is no replacement share, and no wash sale.

This is the sequence you've described, except that here it all happens in a single account (for what I hope is greater clarity).

Exactly. Fairmark notes that the IRS disagrees with the interpretation (which I've snipped) below. If "you" sold ALL the shares, both from within both the IRA and outside, and stay out of the market (in that stock) for 31 days, it generally resembles example 1. Otherwise, it resembles example 5, where he notes the IRS disagrees. (In addition, the requirement for "specific identification" would not be recognized by the broker, hence wouldn't be on record.)

-- Arthur L. Rubin, Brea, CA