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Subject Author Date
Capital Gains - IRA Wash Rule kupchik 04-07-2008
Posted by Barry Margolin on April 8, 2008, 3:42 pm
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> > Phil Marti wrote:
> > >>If you sell a stock in a taxable account at a loss and then buy it
> > >>back in an IRA account within 30 days, are you allowed to claim the
> > >>loss?
> > >
> > > No, according to the IRS. I don't know if it's been litigated, but I
> don't
> > > think so.
> >
> > I thought we had a definitive answer back in December:
> >
> > The IRS yesterday issued an advance copy of Rev. Rul. 2008-5, 2008-3
> > I.R.B. ___ (1/22/08), which applies the § 1091 wash sale rules where a
> > taxpayer sells stock or securities at a loss and then causes her IRA to
> > purchase substantially identical stock or securities within thirty days.
> > As a result, the loss on the sale is disallowed and the taxpayer's
> > basis in the IRA is not increased.
> >
> > http://taxprof.typepad.com/taxprof_blog/files/rev.%20Rul.%202008-5.pdf
> > is a copy of the ruling.
> >
> > Good FAQ item, BTW.
>
> I'd say that such could be a bad ruling. In general, a taxpayer and his IRA
> are separate (but related) entities, especially for ownership purposes
> (although one owns the other).

But the ruling is consistent with the spirit and intent of the wash sale
rule. The purpose of the rule is to prevent taxpayers from turning
paper losses into realized losses, and thus reducing their tax, with
little risk of missing an increase in the security's value. Selling
outside the IRA and then buying inside the IRA would be a pretty
effective way of doing this, although also it has the effect of turning
future capital gains into future ordinary income when you withdraw from
the IRA.

I could definitely see why they'd want to prohibit this in the case of
Roth IRAs. You'd get to realize the loss, but then repurchase the
security and never pay tax on the subsequent growth.

--
Barry Margolin, barmar@alum.mit.edu
Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***

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Posted by Phil Marti on April 8, 2008, 4:44 pm
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 "Barry Margolin" wrote:

> But the ruling is consistent with the spirit and intent of the wash sale
> rule. The purpose of the rule is to prevent taxpayers from turning
> paper losses into realized losses, and thus reducing their tax, with
> little risk of missing an increase in the security's value.

Agreed, but applying the rule to the taxable sale/IRA purchase scenario
enriches the gov't while in a taxable/taxable scenario Uncle Sugar just
breaks even. In the latter, the loss is merely deferred, not eliminated.
Since the IRA can make no tax benefit of the loss, it disappears.

It seems to me that giving the IRA a basis (as in after-tax IRA basis) equal
to the disallowed loss would be more in the spirit and intent of the
statute.

--
Phil Marti
Clarksburg, MD

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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Posted by D. Stussy on April 9, 2008, 12:23 am
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> "Barry Margolin" wrote:
> > But the ruling is consistent with the spirit and intent of the wash sale
> > rule. The purpose of the rule is to prevent taxpayers from turning
> > paper losses into realized losses, and thus reducing their tax, with
> > little risk of missing an increase in the security's value.
>
> Agreed, but applying the rule to the taxable sale/IRA purchase scenario
> enriches the gov't while in a taxable/taxable scenario Uncle Sugar just
> breaks even. In the latter, the loss is merely deferred, not eliminated.
> Since the IRA can make no tax benefit of the loss, it disappears.
>
> It seems to me that giving the IRA a basis (as in after-tax IRA basis)
equal
> to the disallowed loss would be more in the spirit and intent of the
> statute.

There's also the fact that selling TO the IRA is already a prohibited
transaction. I really don't like this because these (the person and his
IRA) are two separate entities for ownership purposes. In a TRUE wash sale,
it's the SAME entity that repurchases the security that was sold. I
certainly hope that this gets struck down soon, but Mr. Marti's response is
a reasonable compromise.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Bill Brown on April 9, 2008, 8:51 am
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>
> There's also the fact that selling TO the IRA is already a prohibited
> transaction.  I really don't like this because these (the person and his
> IRA) are two separate entities for ownership purposes.  In a TRUE wash sale,
> it's the SAME entity that repurchases the security that was sold.  I
> certainly hope that this gets struck down soon, but Mr. Marti's response is
> a reasonable compromise.
>

I like Phil's comment as well. However, Stussy's comment could be used
to support the position that a wash transaction was effectively the
same as a sale to the IRA which disqualified that retirment account.

Related party rules have long been interpreted as applying to wash
sale rules. I don't see the subject Rev Rul as breaking new ground.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Stuart Bronstein on April 9, 2008, 9:49 am
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>> It seems to me that giving the IRA a basis (as in after-tax IRA
>> basis) equal to the disallowed loss would be more in the spirit and
>> intent of the statute.
>
> There's also the fact that selling TO the IRA is already a
> prohibited transaction. I really don't like this because these
> (the person and his IRA) are two separate entities for ownership
> purposes. In a TRUE wash sale, it's the SAME entity that
> repurchases the security that was sold. I certainly hope that
> this gets struck down soon, but Mr. Marti's response is a
> reasonable compromise.

Do the code or regulations include other related party transaction in
the definition of a wash sale? If it's there I couldn't find it. I
suppose it could be argued that the IRS position on wash sales and IRAs
is contrary to the statute and as a result unenforceable.

One perhaps interesting issue: section 1091 talks about "the
taxpayer." Since an IRA is not a tax paying entity, can it be argued
that the IRA is not either "the taxpayer" or "a taxpayer"?

Stu

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

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