Wash sale between taxable and IRA accounts?

Imaginary scenario:

Mar 1: Buy 100sh XYZ in taxable account. Oct 3: Buy 100sh XYZ in IRA. Oct 19: Sell 100sh XYZ in IRA. Oct 20: Sell 100sh XYZ in taxable account at a loss.

So what happens to the loss?

Does the loss from the Oct 20th sale get associated with the shares purchased on Oct 3 in the IRA (and thus the loss is lost forever)? Or because all shares in the IRA were sold before the sale in the taxable account, the loss is allowed?

Reply to
Rich Carreiro
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I don't see a wash here. When you sold in the taxable account for a loss, there were no other shares. If we remove the 10/19 IRA sale, one can make a case that the sale on 10/20 is a wash sale paired to the 10/3 purchase. But as you lay it all out, no wash that I can tell.

Reply to
JoeTaxpayer

Your IRA and you are separate entities. There is no wash sale.

Reply to
D. Stussy

Not so fast. We discussed here, long ago, that selling in a cash account at a loss then immediately buying back in an IRA is a wash sale. The IRA purchase negates the ability to take that loss. A ruling from the IRS was included in that dialog. For the longest time, it wasn't clear, then the IRS published a definitive ruling.

Reply to
JoeTaxpayer

Here's the ruling:

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Even so, I lean towards OP's example, where no replacement shares existed at time of sale in regular account at a loss, not to be a wash sale.

Reply to
Arthur Kamlet

...And if the IRS were always correct, we wouldn't need the Tax Court.

Reply to
D. Stussy

Everything you say is true but not relevant to your example. JoeTaxpayer gave you the proper answer. When you sold the shares in your IRA, you sold the specific shares that you purchased in your IRA. Thus, when you sold the shares in your taxable account, there was no wash sale.

Reply to
Alan

I agree with you that, in general, a person and his IRA are different entities and that, as a result, normally transactions by them would be considered separate.

However the IRS does have the power to change the general rule with respect to transactions that have the result of unreasonably skewing the reporting of income.

In this case I suspect that there should be no wash sale problem. But there may be cases where the transactions together just don't smell right. And in those cases a wash sale may be determined to exist even when the transactions were by technically separate entities.

___ Stu

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Reply to
Stuart A. Bronstein

Where does the wash sale rule say anything about "specific shares"?

Seth

Reply to
Seth

Obviously he meant shares specific to that account. It would be clearer if you recognize that Wash Sales only exist when transactions create losses for tax purposes. Except when liquadating all of your regular IRA's or all of your Roth IRA's, transactions within IRA's do not create tax losses.

Dick

-- Richard D. Adams, CPA

Reply to
Dick Adams

But the Wash Sale Rule applies if I sell in my Ameritrade account and buy in my Scotrade account.

But the transaction outside the IRA did create a tax loss, which the Wash Sale Rule might move into the IRA as a non-tax loss.

Seth

Reply to
Seth

Excellent, Art, I'll save that PDF and link. We agree, no wash. We also agree that "Your IRA and you are separate entities" is incorrect. The lack of wash is due to the other details, the timing of the buy/sell. It would be easy to contrive how a purchase in the IRA would be a wash, but the IRS ruling does a great job with that.

Reply to
JoeTaxpayer

I beg to differ on the conclusion, though I agree with the statement that it is other factors (timing) that control here.

What we have is:

1) Buy 100 @ $50 2) Buy 100 @ $30 3) Sell 100 (#2) @ $35 4) Sell 100 (#1) @40

Where 2-4 are all within 30 days.

Suppose we didn't have transaction #3. We've got a loss of $10/share (#4 shares are matched with #1 shares). I think people would agree that there was a wash sale, because the shares were repurchased (#2) within

30 days (prior to the sale). That those shares are in the IRA doesn't matter.

What I think would "normally" happen (in taxable accounts) if we introduced transaction #3 is that the $10/share loss would (due to wash sale) be associated with transaction #2 shares (adjusting the basis to $40); then the sale of those shares (#3) would recognize a loss of $5/share ($35 less $40 adjusted cost).

Whether #3 came before or after #4 wouldn't matter. The basis for #2 shares would be adjusted due to the wash sale. That's the key point here. (And the point on which I'm most uncertain.)

The effect of introducing the IRA into the problem is just to make the loss unrecognizable.

Reply to
Mark Freeland

That's true. But if you dispose of all your shares (and don't purchase new ones within 30 days after the last loss sale), you can ignore the wash sales because the net result is the same. The loss you had to cancel for #4 is shifted to #3, and they cancel each other out.

What the IRS ruling says is that if you have shares in your IRA, or the IRA purchases them within 30 days of the loss sale, then you haven't "disposed of all your shares" as I described above. So the cancellation doesn't happen, and you have to treat it as a wash sale.

This does seem kind of insidious. Normally when you have a wash sale, things end up OK in the end -- you just delay realizing the loss, you don't lose it entirely. But if you purchase shares in an IRA, the ruling says that you don't adjust their cost bases. Maybe the tax-free compounding of reinvested dividends will make up for this in some cases; but if the stock doesn't pay dividends, I don't think so.

So it's probably a good idea to avoid this type of transaction.

Reply to
Barry Margolin

Barry's conclusion is correct. The scenario presented does not generate a wash sale for the 10/20 transaction. What Mark F overlooked is that the purchase on 10/3 were not replacement shares for the 10/20 sale. They were replacement shares for the 10/19 sale.

Reply to
Alan

I'm still going to disagree with this IRS position for a completely different reason: Transactions inside an IRA are not recognized as capital transactions for tax purposes, and therefore have no basis. The basis of the assets of the IRA is the sum of all the non-deductible contributions to the IRA by the taxpayer, which has no relationship to the cost of assets that the IRA may hold. The problem is that when there is a wash sale, one alters the basis of the subsequent repurchase (cf. IRC 1091(d)). However, how does one increase the basis of an IRA when there has been no contribution (or rollover) to it?

In IRC 1091(a), it talks about the TAXPAYER acquiring the substantially identical stock. An IRA account is not the taxpayer, even if controlled by the taxpayer. Extending the rule to [recognized] controlled entities is outside the scope of the statute as they are separate taxpayers. The only authority granted to the Secretary in this section is for regulations when the amount of the stock (i.e. number of shares) does not equal the amount sold (cf. 1091(b) and (c)) as to how much of that sale at a loss washes out.

Unlike the example in the ruling regarding Security First National Bank and its controlled entity, a taxpayer cannot transfer a non-pension/IRA asset into an IRA, so the use of the example is not sufficiently similar to be controlling. Furthermore, the position does not state why the basis is not increased per 1091(d), which if 1091(a) applied, I see no reason why a

1091(d) adjustment to basis isn't MANDATORY, especially as there is no exception not to perform the adjustment for a tax-deferred trust (or any other entity, including tax-exempt) under the taxpayer's control. The SFNB case forced the basis adjustment at the acquiring controlled entity. Therefore, the ruling is contrary to statute.

Conclusion: The IRS lacks the authority to deny recognition of a capital loss by use of the wash sale rule while simultaneously denying the basis adjustment to the reacquired security, regardless of the type of entity under the taxpayer's control because such a result is contrary to the language of the statute itself. As the ruling denies both, Revenue Ruling

2008-5 is facially invalid.
Reply to
D. Stussy

Here's how I read this - When (3) occurred, it had to be matched with (2), else, if matched with (1) for a loss, the purchase (2) washes the loss. So (3) sells the shared of (2). When (4) occurs, it's a loss, as it has to be matched with (1) as that's all that's left.

Another way to look at it - (I'm thinking out load here, not 100%) - After 3 occurs, and it's the IRA shares, bought and sold, where is the wash remnant? Doesn't there have to be a sale for a loss that's washed in the first place? How can the final sale (4) create the wash factor?

Reply to
JoeTaxpayer

What the ruling says is that this interpretation would allow you to do an end run around the purpose of the wash sale rule. You would get to realize the loss while still replacing the shares immediately, although in a tax-deferred account instead of the taxable account.

Reply to
Barry Margolin

contributions to

controlled by

Well then, according to RR 2008-5, if I were to reverse the situation and sell at a loss a security in my IRA and then buy it back within 30 days using a non-IRA account, I should be able to increase my basis in the non-IRA purchase by the amount of the "wash sale loss" that happened in the IRA even though that loss is already a non-recognized loss (for inside the IRA) because the IRA and the taxpayer himself constitute a controlled entity group and the IRA's tax deferred status doesn't matter.

I think that that conclusion is utter nonsense (and the RR itself likewise), but it is what the RR implies. Can you show me that I'm wrong without voiding the RR?

Reply to
D. Stussy

What's different is that the second scenario doesn't allow you to reduce your taxes.

Government lawyers are not mathematicians or engineers, they don't just look at the mechanics; it's not the case that "if A is equivalent to B, then they should have the same legal consequences." They look at the

*intent*. The purpose of the wash sale rule is to prevent you from turning a paper loss into a realized loss with little risk, by selling and quickly repurchasing a security, and thus reduce your taxes now.

Doing the opposite, selling in an IRA and repurchasing outside the IRA, is not an attempt to get around the law. The sale doesn't have any potential tax implications, so there's no way to gain with that set of transactions.

Reply to
Barry Margolin

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