Wash Sales Rule

[gwithers13]

If I sell a stock at a loss in my taxable account and repurchase immediately in a tax sheltered account, does the wash sale rule apply?
thanks in advance

[OldJack]

Investment transactions in a qualified retirement account would not have anything to do with your personal investment accounts, so the wash rule would not be applied in the case you describe.

[jainen]

This is logical

Investment transactions in a qualified retirement account would not have anything to do with your personal investment accounts, so the wash rule would not be applied in the case you describe.

This is logical, but it is not correct. Well, maybe it is technically correct in terms of vocabulary, but it's wrong in every practical way.

The wash sale rule as such doesn't discuss related parties, so why can't anybody sell and have their spouse or their S-Corp repurchase? Or even their IRA? It's because the wash sale rule is not the only one in the book. The IRS explains the issue in Pub 550.

"Indirect transactions. You cannot deduct your loss on the sale of stock through your broker if, under a prearranged plan, a related party buys the same stock you had owned. This does not apply to a trade between related parties through an exchange that is purely coincidental and is not prearranged."

Don't get too excited about that "purely coincidental" bit--when a single person controls both transactions, it's not a coincidence. And although I don't like to use pubs except for general explanations, I can assure you that the IRS position has been upheld in court many times. In fact, even the Supreme Court agrees.

[Jan]

I agree with OLDJACK, if I sell stock on my investment account and take a lost, and then buy the same stock in my self-direct IRA, I don't believe I have a wash sale, I know I read this somewhere, just can't find it yet, will keep looking.

[gwithers13]

Wash sale followup

Thanks for everyone's input. If there is more to offer, I would apprecaite it as it still seems that there are 2 perspectives.

[OldJack]

The original post said "tax sheltered account" which I read as a qualified retirement account and composed my response on that basis. I believe the IRS Pub is referring to "Abusive tax shelters commonly involve package deals that are designed from the start to generate losses, deductions, or credits that will be far more than present or future investment.... etc." page 28 If the poster is referring to a tax shelter account with current tax attributes, then I would agree the transactions are subject to the wash sale rules.

You make an excellent point on related parties and transactions. However, I believe that transactions within a retirement account are not recognized as current taxable transactions, indirect transactions, or personal transactions and would not have any relationship to personal stock sales and the wash sale rule even when the taxpayer is also the trustee/custodian of a retirement account. If you could prove/claim that the trustee/custodian violated his fiduciary responsibility in making the transaction, then I would agree.

[gwithers13]

A qualified plan

Yes the account in which the purchase would be made is a qualified rollover IRA which has been open for several years.

[OldJack]

Code sec 1091(d) says that where a loss is disallowed under the wash sale rule, the basis of the "acquired stock" takes account of the unrecognized loss in the following manner:

(1) If the sales price is less than the repurchase price, the basis of the new stock is the basis of the stock sold plus the difference between the repurchase and the sales price.

(2) If the sales price is more than the repurchase price, the basis of the new stock is the basis of the stock sold minus the difference between the sale and the repurchase price.

I really think you would have a problem adjusting the basis of stock in a qualified retirement account when the basis is actually immaterial for tax purposes. I don't believe that wash sale rules were designed or intended to be applicable to a qualified retirement account.

[gwithers13]

thanks for the time on this

I appreciate everyone's time.

[Jan]

After reading this article, I now agree with Jainen.

Wash Sales and IRAs
Tax risk if you buy stock in an IRA after selling the same stock at a loss.

It's downright amazing how often we get this question:

If I sell stock at a loss, is it OK to buy it again right away in my IRA?

The concern, of course, is the wash sale rule. If you buy the same stock right away in a regular brokerage account, the wash sale rule says you can't deduct the loss on your sale. It's natural to wonder if you can avoid this rule by buying the stock in an IRA. If it worked, this approach would allow you to have your cake and eat it too: you would get to deduct your loss while continuing your investment in that particular stock without interruption.
There's plenty of confusion about this rule, even among tax professionals. The answer, according to the IRS, is that you lose the deduction if you buy replacement shares in your IRA. The problem is that the answer isn't easy to find.

Wash Sales and Related Parties
If Congress were writing the wash sale rule today, they would make it apply to related parties. They did that for more recent rules dealing with financial transactions, such as the constructive sale rule. Yet the wash sale rule is relatively ancient and has never been brought up to date. Nothing in the law says it applies to related parties.
If that were the end of the story, you could go ahead and buy replacement stock in an IRA. You could also have your spouse or another relative buy replacement stock, or use an entity you control (such as a corporation, a trust or a family partnership) to buy replacement stock. No one would have to worry about the wash sale rule because it would be so easily avoided. That sounds too good to be true, and it is. But why?

Sales to Related Parties
The wash sale rule is only one of the rules that can prevent you from claiming a deduction when you sell stock at a loss. You lose the deduction also if you sell to a related person. In the special language of the tax law, a "person" includes not only human beings, but also entities like the ones mentioned above: corporations, trusts, partnerships — anything that can be used to maintain indirect ownership of other assets, including stock.
If you sell stock at a loss to a related person, you can't deduct the loss. What's worse, unlike a wash sale, a sale to a related person prevents you or the related person from claiming a loss deduction on a later sale. That's a painful result, but you may be wondering what it has to do with the original question. No one ever said anything about selling stock to an IRA. The idea is to sell the stock to a stranger, then use the IRA to buy replacement shares, presumably from a different stranger.

Indirect Sales
The IRS says a contemporaneous sale and purchase should be treated as an indirect sale to a related person if they occurred together as part of a plan. Their position is backed up by decisions where courts ruled in favor of the IRS. Here's a quote from IRS Publication 550:

Indirect transactions. You cannot deduct your loss on the sale of stock through your broker if, under a prearranged plan, a related party buys the same stock you had owned. This does not apply to a trade between related parties through an exchange that is purely coincidental and is not prearranged.

The IRS allows for the possibility that a purchase of replacement shares could occur by coincidence, for example if you and your adult child are both active investors who trade independently. Realistically, no one is going to believe the transactions were coincidental if the same person directed both of them. And that's exactly what's going on when you sell stock in a brokerage account and buy replacement shares in an IRA.
The IRS position is backed up by a ruling by the Supreme Court in a 1947 case called McWilliams (331 US 694). That case deals with a situation where a husband sold stock at a loss and had his broker buy replacement shares for his wife's account. I can't think of a good reason to treat repurchase in an IRA any differently.

Caveat Lector
It's possible you'll find a contrary opinion, perhaps even from a reputable tax professional. The main reason for this is that you can study the wash sale rule all you want without finding anything about related parties. Most people won't even think of the rule for sales to related parties, because you aren't actually selling to your IRA.
Another reason for confusion is that the tax law uses rather arcane language to tell us when a trust is a "related person." It's easy to get hung up in that language and convince yourself that an IRA isn't related to its owner. Common sense tells you otherwise, and so does the tax law if you can work through the technicalities.
According to one article I saw, an IRS agent posted an answer to this question on the IRS web site saying it was OK to buy replacement shares in an IRA. Every year the IRS gives many thousands of incorrect answers in informal guidance of this kind. The official position of the IRS is the one quoted earlier from Publication 550, not the offhand response of an agent responding to an email question.

Reality Check
The wash sale rule and the rule for sales to related parties work together for a single purpose: to prevent you from claiming a loss deduction while maintaining uninterrupted ownership of your stock. If you aren't willing to part with the stock, you aren't eligible for the deduction. Buying replacement shares in an IRA is a gimmick designed to defeat the basic purpose of these provisions. It shouldn't work, and if the IRS position in Publication 550 is upheld, it won't.