Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (23) | Ignore Thread Prev Thread | Next Thread
Author: rcthacker One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: IRS Wash Sale Rule Date: 11/30/2010 1:04 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
It is my understanding that the wash sale rule originated in the 1930s. Does anyone in this discussion group know of the particular case(s) and resulting judicial opinion(s)? Thanks.

rcthacker
Print the post Back To Top
Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111535 of 121061
Subject: Re: IRS Wash Sale Rule Date: 11/30/2010 2:17 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
It is my understanding that the wash sale rule originated in the 1930s. Does anyone in this discussion group know of the particular case(s) and resulting judicial opinion(s)?

It only looks to casual observers that I was around in the 30's, so I don't know anything about what happened then. I can tell you that today's rule is found in the Code at section 1091 and that it was in the original 1954 Code. I don't know whether there have been court challenges to the statute or not, but I do know that if there have been they haven't resulted in a reversal of it.

If this doesn't help, maybe if you told us why you're asking and whence cometh your understanding someone could help.

Phil
Rule Your Retirement Home Fool

Print the post Back To Top
Author: rcthacker One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111545 of 121061
Subject: Re: IRS Wash Sale Rule Date: 11/30/2010 7:51 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
There is no provision for capital gains and losses within retirement accounts whether employer sponsored (e.g., 401k) or individual (IRA). The IRS wants to know the cash flows: allowable contributions, conversions, and distributions. They also want to know year-end balances to make sure the RMD is met. It seems to me that the IRS only sees the retirement account as a taxable black box. All moneys that come out of a retirement account are fully taxable.

So, the issue is, if one sells an equity in a taxable account at a loss and claims that loss on the tax return, AND, also simultaneously purchases that same equity in a retirement account for which full taxes will be paid at distribution, how would that be a wash sale/purchase. Or, suppose the opposite: sell in the IRA at an investor loss, but not tax deductible, AND, simultaneously purchase in a taxable account.

Revenue Ruling 2008-5 states that these would be wash sales. But, retirement accounts are not subject to the same tax provisions. What is the basis of the original wash sale tax provisions?

rcthacker

Print the post Back To Top
Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111546 of 121061
Subject: Re: IRS Wash Sale Rule Date: 11/30/2010 8:07 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 4
So, the issue is, if one sells an equity in a taxable account at a loss and claims that loss on the tax return, AND, also simultaneously purchases that same equity in a retirement account for which full taxes will be paid at distribution, how would that be a wash sale/purchase.

Because the Revenue Ruling you cited (2008-5), which interprets Code Section 1091, says so. This fact pattern has been unclear for decades. The IRS finally took a position with this Rev. Rul. in 2008.

A Revenue Ruling is the IRS' stated position on an issue. It isn't law, but it is the IRS interpretation of the law. If you disagree, you are welcome to take a contrary position on your tax return, then argue your case in court.

Or, suppose the opposite: sell in the IRA at an investor loss, but not tax deductible, AND, simultaneously purchase in a taxable account.

That is not a problem. The loss inside the IRA isn't deductible, so wash sales aren't an issue.

--Peter

Print the post Back To Top
Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111547 of 121061
Subject: Re: IRS Wash Sale Rule Date: 11/30/2010 8:11 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
All moneys that come out of a retirement account are fully taxable.


All previously untaxed contributions are taxable when distributed. 401Ks and IRAs allow after-tax contributions.

So, the issue is, if one sells an equity in a taxable account at a loss and claims that loss on the tax return, AND, also simultaneously purchases that same equity in a retirement account for which full taxes will be paid at distribution, how would that be a wash sale/purchase. Or, suppose the opposite: sell in the IRA at an investor loss, but not tax deductible, AND, simultaneously purchase in a taxable account.

The best approach is to avoid the situation. If you wish to be a test case, that is your choice. Retirement accounts didn't exist when the wash sale rules were inacted. Unless you are willing to take the issue to court, arguments that a Revenue Ruling is incorrect are futile.

The Revenue Ruling makes it clear that it the wash sale is one-way. When a wash sale crosses the boundary of a retirement account, the loss can never be used as a tax deduction.

Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111548 of 121061
Subject: Re: IRS Wash Sale Rule Date: 11/30/2010 9:22 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
rcthacker: "There is no provision for capital gains and losses within retirement accounts whether employer sponsored (e.g., 401k) or individual (IRA). The IRS wants to know the cash flows: allowable contributions, conversions, and distributions. They also want to know year-end balances to make sure the RMD is met. It seems to me that the IRS only sees the retirement account as a taxable black box. All moneys that come out of a retirement account are fully taxable."

That last sentence is simply wrong.

Traditional IRA's can hav basis, if non-deductible contributions were made; when withdrawals are made, an allocated portion of the withdrawal will be return of basis and non-taxable.

Qualified withdrawals from Roth IRA's (and now also Roth 401-k's) are not taxable, either.

And Phil gave you an excellent response, too.

I supect that you have some "goal/transaction" in mind that you have not yet fully elaborated to the Board.

Regards, JAFO

Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111549 of 121061
Subject: Re: IRS Wash Sale Rule Date: 11/30/2010 9:24 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
vkg: "The Revenue Ruling makes it clear that it the wash sale is one-way. When a wash sale crosses the boundary of a retirement account, the loss can never be used as a tax deduction."

But can it establish basis in the IRA? It has been awhile since I have read the Revenue Ruling.

Regards, JAFO

Print the post Back To Top
Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111550 of 121061
Subject: Re: IRS Wash Sale Rule Date: 11/30/2010 10:49 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
vkg: "The Revenue Ruling makes it clear that it the wash sale is one-way. When a wash sale crosses the boundary of a retirement account, the loss can never be used as a tax deduction."

But can it establish basis in the IRA? It has been awhile since I have read the Revenue Ruling.


No, it cannot.

Ira

Print the post Back To Top
Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111551 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/1/2010 12:32 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Revenue Ruling 2008-5 states that these would be wash sales. But, retirement accounts are not subject to the same tax provisions. What is the basis of the original wash sale tax provisions?

OK, now we know that you're talking about RR 2008-5, but I still can't make sense of your question. Are you asking what's the reasoning behind section 1091? While it's always dangerous to assume that tax law is logical, in this case the idea is that when a wash sale occurs your economic position hasn't changed, thus there should be no immediate tax consequence. Tax recognition of the loss is deferred until you dispose of the investment for real.

If you can get the search feature to work you might find the lengthy discussions we had about this situation back before the ruling was issued. I'm not a fan of the ruling since it offends my sense of fairness. While I can understand not allowing the paper loss on the tax return, it seems to me that it's unjust that it just disappears and you never get to take tax advantage of the loss. I'd be happy if it created a post-tax "basis" (different kind of basis, JAFO) in the retirement account to be recovered in the same manner as after-tax contributions.

Alas, I've not yet been named benevolent omnipotent dictator. Someone mentioned that while a ruling carries a lot of weight, it's not dispositive. The courts could kick it to the curb, but aside from the logistics of getting the IRS to assess a deficiency based on it so you have something to argue in court, it takes forever. Far simpler in execution would be Congress, which could address it by statute.

Phil
Rule Your Retirement Home Fool

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111552 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/1/2010 12:50 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
The Revenue Ruling makes it clear that it the wash sale is one-way. When a wash sale crosses the boundary of a retirement account, the loss can never be used as a tax deduction.


arg. i think i just did this on accident...

i wanted to 'move' some stock from taxable acct to IRA .. so i sold it (not even thinking about gain/loss, then a couple days later bought it in the IRA.


only a $20 loss , so no big ...but how to report it? />:



=

Print the post Back To Top
Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111553 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/1/2010 1:09 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
arg. i think i just did this on accident...
i wanted to 'move' some stock from taxable acct to IRA .. so i sold it (not even thinking about gain/loss, then a couple days later bought it in the IRA.
only a $20 loss , so no big ...but how to report it?

_______________________________________
Just report a zero gain/loss on the sale. (Reduce your basis by the $20 to get to zero.)

Bill

Print the post Back To Top
Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111554 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/1/2010 1:16 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
<II>only a $20 loss , so no big ...but how to report it?
_______________________________________
Just report a zero gain/loss on the sale. (Reduce your basis by the $20 to get to zero.)




thanks sounds easy enough ..

in fact, set basis=proceeds and i don't even have to compute anything


(>,

Print the post Back To Top
Author: rcthacker One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111559 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/1/2010 1:01 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
http://www.irs.gov/irb/2008-03_IRB/ar08.html

' . . .
Under §§ 408 and 72, any amount distributed from an individual retirement account is includible in the distributee’s gross income for the year of the distribution unless it is properly allocable to the account owner’s basis in the account. Under § 408A, a similar income inclusion rule applies to nonqualified distributions from a Roth IRA. An individual has basis in an individual retirement account only to the extent that the account includes nondeductible contributions.

. . .
HOLDING

The loss on the Sale of stock is disallowed under § 1091. A’s basis in the individual retirement account or Roth IRA is not increased by virtue of § 1091(d).
. . .'

I have no basis in my IRA (all pretax contributions). All distributions from my Roth are qualified - no basis. IRC 1091 appears to talk about the disallowance of a lowered basis.

I do a conversion from IRA to Roth: simultaneous sale in IRA and purchase in Roth. I sell at a loss in a taxable account to pay tax on conversion. Same security in all transactions same day. Distribution is from IRA.

rcthacker

Print the post Back To Top
Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111560 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/1/2010 1:30 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
I do a conversion from IRA to Roth: simultaneous sale in IRA and purchase in Roth. I sell at a loss in a taxable account to pay tax on conversion. Same security in all transactions same day. Distribution is from IRA.

Yep. That's a wash sale, and it comes under the situation described in Rev Rul 2008-5. Bummer for you.

But I do have a question. Did you really sell the stock in your traditional IRA, move the cash to your Roth IRA, then repurchase the stock in your Roth IRA? Because it would be easier (and avoid some trading commissions) if you just moved the stock itself from the traditional to the Roth IRA.

If you moved the stock rather than sell and repurchase, then you wouldn't have a wash sale as there would be no repurchase.

--Peter

Print the post Back To Top
Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111561 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/1/2010 1:31 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
I have no basis in my IRA (all pretax contributions). All distributions from my Roth are qualified - no basis. IRC 1091 appears to talk about the disallowance of a lowered basis.

You're mixing apples and hand grenades here. "Basis" has a different meaning in retirement accounts than it does in taxable accounts.

In a traditional retirement account basis is after-tax contributions. Every distribution from that account is a proportional combination of basis and everything else. (Note: there's an exception for rollovers from traditional IRAs to 401(k)'s, but that's irrelevant to this discussion.)

In a Roth account basis is moot since everything but earnings has been taxed and distributions follow the order specified in section 408A.

In a taxable account basis is what you paid for the asset, as adjusted.

All retirement accounts are tax-exempt entities, so there's no tax consequence of transactions within the account, be they for a gain or a loss.

In a taxable account basis is one component in figuring the taxable gain or loss resulting from a transaction. If the transaction results in a loss section 1091 dictates the treatment of that loss.

I do a conversion from IRA to Roth: simultaneous sale in IRA and purchase in Roth.

I suppose you could do it that way, but it's a little silly to incur unnecessary transaction fees. You can just move the asset from the traditional IRA to the Roth. Its value is the amount converted.

I sell at a loss in a taxable account to pay tax on conversion. Same security in all transactions same day. Distribution is from IRA.

I don't know what you mean by the last sentence since you haven't described any distribution from any IRA except for the rollover to Roth. Thus I'll ignore it.

You didn't ask a question, but I'm going to guess you want to know how the ruling we've been talking about applies. Since it doesn't change the treatment I'll ignore the proposed sale/repurchase step and go with a direct moving of the stock from the traditional IRA to the Roth. You haven't replaced the shares sold from the taxable account, so the wash sale rule doesn't apply.

Example with numbers:

Before the exercise you hold:

Traditional IRA: 100 shares
Roth IRA: 0 shares
Taxable: 100 shares

for a total of 200 shares.

When the dust settles you hold:

Traditional IRA: 0 shares
Roth IRA: 100 shares
Taxable: 0 shares

for a total of 100 shares.

Phil
Rule Your Retirement Home Fool

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111562 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/1/2010 1:33 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Yep. That's a wash sale

Food fight!

How's there a wash sale when no replacement shares were purchased?

Phil
Rule Your Retirement Home Fool

Print the post Back To Top
Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111563 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/1/2010 2:43 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
How's there a wash sale when no replacement shares were purchased?

He said he sold shares at a loss in a taxable account and purchased the same stock in his Roth IRA on the same day.

Or at least that is the way I interpret the sentence you said you didn't understand.

So I guess we're back to [mis]interpreting some cryptic message board postings. I'm pretty sure we agree on the tax law here. It's just the facts that are in question.

--Peter

PS - Or is it: the facts which are in question. Where's Sister Mary Severe when you need her?

Print the post Back To Top
Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111564 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/1/2010 7:05 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
How's there a wash sale when no replacement shares were purchased?

He said he sold shares at a loss in a taxable account and purchased the same stock in his Roth IRA on the same day.


I guess it boils down to the specifics and how they would be interpreted. If he started with 200 shares, sold them all, and repurchased 100, the question would be whether the repurchase would "wash" the 100 sold in the taxable account or the 100 in the traditional IRA. Might it depend on the timing of the trades, ie., the first shares sold (even if only be a few minutes) are the ones "washed".

If the IRA shares were transferred to the Roth and not repurchased, then there would be no wash sale and the loss would be deductible.

Ira

Print the post Back To Top
Author: CTkaren Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111565 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/1/2010 9:35 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
If the IRA shares were transferred to the Roth and not repurchased, then there would be no wash sale and the loss would be deductible

I didn't think one could put anything into an IRA except cash. Am I mistaken?

Print the post Back To Top
Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111566 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/1/2010 10:03 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
I didn't think one could put anything into an IRA except cash. Am I mistaken?

Contributions must be in cash. Rollovers and conversions can be in stock or other assets.

--Peter

Print the post Back To Top
Author: rcthacker One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111567 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/2/2010 12:24 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
TMFPMarti: (I don't know how to do fancy italics. So, I put your text in quotes: '. . .').

'You're mixing apples and hand grenades here. "Basis" has a different meaning in retirement accounts than it does in taxable accounts.'

The author of RR 2008-5 doesn't make any distinction.

'In a traditional retirement account basis is after-tax contributions. Every distribution from that account is a proportional combination of basis and everything else. . . '

Understood.

'In a Roth account basis is moot since everything but earnings has been taxed and distributions follow the order specified in section 408A.

In a taxable account basis is what you paid for the asset, as adjusted.

All retirement accounts are tax-exempt entities, so there's no tax consequence of transactions within the account, be they for a gain or a loss.'

Ok. So, then on what grounds could a tax loss in a taxable account be disallowed when making a simultaneous purchase in a retirement account?

'In a taxable account basis is one component in figuring the taxable gain or loss resulting from a transaction. If the transaction results in a loss section 1091 dictates the treatment of that loss.'

What does Sec. 1091 say about simultaneous purchase in retirement account?

. . .

Distribution is from IRA.

'I don't know what you mean by the last sentence since you haven't described any distribution from any IRA except for the rollover to Roth. Thus I'll ignore it.'

The rollover is a taxable distribution.

The author of RR 2008-5 says tax loss in taxable account is not allowed if simultaneous purchase in retirement account. He seems to infer that the cost basis in the retirement account shall be the same as the former cost basis in the taxable account. Thus, no advantage. And, that anticipated advantage is disallowed in the tax year of taxable account sale.

Is cost basis the BASIS for disallowance? Or, are there some other grounds?

Back, before this Revenue Ruling, you mentioned previous discussions. Anyone recall any Law Review articles?

BTW, Revenue Rulings, as well as, Tax Court decisions are administrative
interpretations (IRS captives). Still subject to federal judiciary review especially if arbitrary and capricious (Oh, I don't know, I just felt like it.)

rcthacker

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111568 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/2/2010 1:06 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 5
What does Sec. 1091 say about simultaneous purchase in retirement account?

Nothing. And that's the problem.

The question is: Does a sale at a loss in a taxable account plus the repurchase of the stock in an IRA constitute a wash sale under code section 1091? Rev. Rul. 2008-5 says "yes."

And that is the extent of the tax law and regulations. That's what we've got to work with.

If you don't like that answer, you are quite correct that a judge can reverse it. But it takes someone who is willing to go to court. Do you care to be the test case?

--Peter

Print the post Back To Top
Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111569 of 121061
Subject: Re: IRS Wash Sale Rule Date: 12/2/2010 10:17 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
Back, before this Revenue Ruling, you mentioned previous discussions. Anyone recall any Law Review articles?

BTW, Revenue Rulings, as well as, Tax Court decisions are administrative
interpretations (IRS captives). Still subject to federal judiciary review especially if arbitrary and capricious (Oh, I don't know, I just felt like it.)

rcthacker

_______________________________
I think there were some, but not worth it to me to research at the moment. No, you're right. A Rev. Rul. is not the law, and it is subject to challenges in the courts.

But it does mean that it is the position of the IRS National Office.
It does mean that an auditor is required to follow it.
It does mean that an appeals officer is required to follow it.
So going to court would be your only recourse.

And if you could avoid that controversy by delaying your repurchase for 31 days, that's useful information to have.

Bill

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (23) | Ignore Thread Prev Thread | Next Thread
Advertisement