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Financial Planning / Tax Strategies
|Subject: IRS opinion of Wash sales: taxable and IRA||Date: 12/7/1999 10:54 PM|
|Author: ptsurmr||Number: 22488 of 122998|
On 11/24/99 I posed a question to this board (post 21679: http://boards.fool.com/Message.asp?id=1040014006532000&sort=id ) regarding selling a stock in a taxable account for a loss and immediately buying it back in an IRA. Doing so might have some nice advantages:
1) Can take loss on tax return to offset gains and/or earned income
2) Buying back in IRA will preserve your position in the stock (nice if you believe the stock is undergoing a temporary downturn but is soon to rise)
3) After 30 days, you can sell the stock in your IRA and buy back in your taxable account at a perhaps higher cost basis.
In essence, you use this technique to offset some of the stock downturn while still maintaining your position in the stock.
Much good discussion resulted in the follow-up posts to this original thread, and I thank those kind enough to share their opinion. I took the opportunity to email the IRS with the same question. Today I received their response. Below is the response I received directly from an IRS employee (I have removed the employee's name and employee ID, which was provided in the original message). If (BIG if) I understand this correctly, it sounds like what I propose is doable. I would appreciate hearing your thoughts on this matter...
Date: Tue, 7 Dec 1999 20:05:32 -0600
Subject: IRS Email Tax Law Assistance
NOTE: Our response to your tax law question appears below. If you have additional questions on this or other general tax law topics, please return to our web site at: (http://www.irs.ustreas.gov/prod/help/newmail/user.html to submit it. Please do not use your "reply" button to send a follow-up question.
Thank you for your inquiry regarding wash sales on stocks. The confusion you may be having is you are trading for two different kinds of accounts. The wash sale rules were made so you would not be able to realize a loss on the sale and purchase of identical stock made within a 30 day period. You cannot claim a loss on a tax-deferred account, such as an Individual Retirement Account (IRA), until a distribution is made. Publication 590, Individual Retirement Arrangements, clarifies this issue:
"Recognizing Losses on IRA Investments. If you have a loss on your traditional IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis, if any. Your basis is the total amount of the nondeductible contributions in your traditional IRAs. You claim the loss as a miscellaneous itemized deduction, subject to the 2% limit, on Schedule A, Form 1040."
To answer your Question 1 and 2 you would recognize a 100 short term loss in 1999 and have a basis in the IRA of 200, assuming you are using the assets from the IRA to make the purchase. In Question 3 you would not show a loss in the IRA. You have a basis of 200 for the 100 shares. Gain or loss at this point depends on what you do with these 100 shares after you purchased them.
Publication 550, Investment Income and Expense, can provide you with some general information on wash sales.
The publications and forms identified in this response can be ordered by calling 800-829-3676 or downloaded from our web site at www.irs.gov. We apologize for the delay in responding to your inquiry and hope this information is helpful.
Your Question Was:
This question concerns Wash sales of stocks between taxable and tax-deferred accounts:
1) Jan 15th, 1999: In a taxable brokerage account, I purchase 100 shares of XYZ for $2 per share (total = $200)
2) Dec 1st, 1999: I sell the 100 shares of XYZ purchased in step (1) above for a loss, say at $1 per share (loss = $100).
3) Dec 1st, 1999: I purchase 100 shares of XYZ in a regular IRA for $1 per share.
Question 1: Since the loss occurred in a taxable account, can I use it to adjust the basis in the repurchased shares in the IRA?
Question 2: Can I take the $100 as a short term capital loss on my 1999 tax return?
Question 3: If I switch the accounts in the above example (make the original purchase in the IRA, then sell at a loss in the IRA, then immediately repurchase the shares in a taxable account, may I adjust his basis in the repurchased shares in the taxable account for the IRA loss?
We are interested in your opinion and providing the best possible service to you. Please take a moment to answer our survey at: http://www.irs.ustreas.gov/help/newmail/email-survey.html
This answer is based on our understanding of the facts you presented in your question. Omission of facts may affect the answer given.
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