Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
Wash Sale and IRAs
Posted by: charlieusa, December 29, 2017 09:08PM
I need some help understanding Wash Sales.

Let me tell you what I understand: page 60 of the IRS pub 550 [www.irs.gov] defines:

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
1. Buy substantially identical stock or securities,
2. Acquire substantially identical stock or securities in a fully taxable trade,
3. Acquire a contract or option to buy sub-stantially identical stock or securities, or
4. Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.

If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold.

And specifically there is the "Revenue Ruling 2008-05" [www.irs.gov]
which clarifies selling in taxable account and buying in an IRA ( #4 above).


My question is: Does selling an Stock at a loss in an IRA and buying back the same Stock in a Brokerage account constitute a wash sale? The wording of IRS pub 550 only specifies that, it is ' sell or trade stock or securities at a loss', and adding specifically ,(#2), that buying in a taxable account is wash sale, indicating that it is a wash sale.

Stating it in another way: It would seem that from the definition of a wash sale-- (pub 550) "A wash sale occurs when you sell or trade stock or securities at a loss...." not specifying anything about which account the sale is in, that a sale at a loss in an IRA could have create a wash sale by definition.

You ask why would I care? The last sentence of the above quote from IRS pub 550 states:
"Your holding period for the new stock or securities includes the holding period of the stock or securities sold".

If one simultaneously bought an Stock in the brokerage account and sold the same Stock at loss from an IRA, which was held 1+ years. The sale would be a wash sale, meaning that the Stock in the brokerage account would have the same loss and holding period. ie in this case, have an unrealized long term loss in the taxable brokerage account.

Is this a kind of loop hole for the wash sale rule?

To date I have not found any additional clarification from the IRS or from other sites.

Re: Wash Sale and IRAs
Posted by: Art, December 29, 2017 09:37PM
>>> My question is: Does selling an Stock at a loss in an IRA and buying back the same Stock in a Brokerage account constitute a wash sale?
<<<

No.

When you sell assets in your IRA you do not have a *capital* loss.

Re: Wash Sale and IRAs
Posted by: charlieusa, January 9, 2018 07:18AM
Thank you for your quick response. I understand completely what you are saying, and your explanation is exactly the intention of the rule of a wash sale.

What got me wondering is the definition of a wash sale does not specify the type of loss, and thus by definition a loss in an IRA could result in a wash sale if stock is repurchased within 30 days.

Do you know of a different definition (or clarification) for a wash sale?

OR, could you point out, using the words from the IRS' definition, why it would not apply.

Re: Wash Sale and IRAs
Posted by: Kaye Thomas, January 9, 2018 03:39PM
You're looking at language in an IRS publication, which is informal guidance, rather than language in the law. The wash sale rule applies only when there is a loss to be claimed. Losses within an IRA can't be claimed on a tax return, so there is nothing to trigger the wash sale rule.

Kaye Thomas
Fairmark.com



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