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Subject:  Re: Wash Sales & IRA Accounts Date:  7/29/2000  4:46 PM
Author:  TMFTaxes Number:  38181 of 127753

<<I agree with the last two sentences of Bob's post. I admit that I have done no research on this topic, but why can the basis not be transferred to the IRA (if it is a regular IRA)? It is clear that after-tax contributions to a regular IRA by those not eligible to deduct the contribution create basis in the IRA, and no additional FIT is due on those dollars that were taxed going into the regular IRA. Admittedly, this idea/theory does not fit well with the idea that the gain is recognized when the "washed" shares are sold, but it is not inconsistent with general theory regarding either wash sales or regular IRAs.

I am aware that this idea/theory would not work WRT a Roth IRA, but the IRC has had (and will continue to have) inconsistencies and oddities.>>

I have never done the research on the "lost" loss or the adjustment to basis question...and don't plan on doing it here. But my thoughts would go along the same lines as JAFO in the statement above. If the IRS slapped me with a wash sale, I would certainly try like heck to create basis in the IRA account. That would be the ONLY way to salvage the transaction in any way, shape, or form.

Because I haven't researched the issue, I could make a case either way at this point in time (completely losing the loss OR creating basis in the IRA). Which leads me to believe that a BUNCH of research would have to be undertaken in order to find a way to "create" basis in the IRA account. Again, I'm not sure if it's possible. But if pushed against the wall, I would certainly try.

And, with respect to the issue of harsh (or absurd) results...let's look at the following:

Randy, a single person, invests $100,000 shares of company XYZ. Randy watches the stock price steadly drop, until his $100,000 investment drop until it's worth little more than $5,000. Randy sells out with a $95,000 short term capital loss. Randy has no other assets (either stock or property) in order to create gains with which to offset the losses. Randy is so despondent over this turn of events, he decides to jump out of his office window. 32nd floor. Adios.

What happens to this $95k loss? Well, $3k of it can be used on Randy's final income tax return for the year. What about the remaining $92k?

Carry it back? Nope.
Carry it forward? Nope...Randy's no longer around and will have no need to file tax returns in the future.
Carry it to Randy's estate and reduce estate taxes? Nope again.
Pass the loss to Randy's beneficiaries? Nope.

So what happens to this $92k loss? Lost. Gone completely. Nobody will receive any tax benefit from this loss. It was carried by Randy to the grave.

Harsh? You bet. Absurd? Possibly. The law? Yup.

So just because something in the tax law seems absurd or harsh doesn't necessary make it incorrect.

TMF Taxes

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