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Author: TaxService Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Re: Equiv of wash sales for gains? Date: 10/9/1999 2:37 PM
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One final note: while the wash sale provisions work on shares that you sell for a loss, there are no corresponding provisions for stock that you sell at a gain and then immediately repurchase. So, while wash sale losses can't be claimed, gains can't be avoided. That is, if you sell stock for a gain and buy it right back, you must still report the gain -- no special gain deferral rule applies.

If that is so, then what is this I read about rollover of capital gains on p58 of IRS Publication 550? There is a section that describes how to delay paying capital gains tax on the profit from the sale of a publicly traded security by buying a replacement property within 60 days of the sale, and declaring a basis change according to a specific formula.

This seems to me to be direct contribution of the Foolish statement above. What am I missing? Why can't I sell on the peaks, buy on the valleys, and then delay the final sale until sometime later to get the lower capital gains tax?

Granted, I know the risks of this kind of market timing as an investment strategy, but every once in a while, I want to protect against a big fall with certain stocks, and it seems like this would let me do it without penalty.


***NOt sure that I fully understand your question. There are rules governing the sales of qualified small business stock. If bandwidth carries it, the following describes circumstances that may qualify you for a tax-free rollover of all or part of the gain.

Beginning in 1998, you may be able to exclude part of the gain from your income.

Qualified small business stock. This is stock that meets all the following tests.
It must be stock in a C corporation.
It must have been originally issued after August 10, 1993.

As of the date the stock was issued, the corporation must have been a qualified small business, defined later.

You must have acquired the stock at its original issue, directly or through an underwriter, in exchange for money or other property (not including stock), or as pay for services provided to the corporation (other than services performed as an underwriter of the stock). In certain cases, your stock may also meet this test if you acquired it from another person who met this test, or through a conversion or trade of qualified small business stock that you held.
The corporation must have met the active business test, defined later, and must have been a C corporation during substantially all the time you held the stock.

Within the period beginning 2 years before and ending 2 years after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from you or a related party.

Within the period beginning 1 year before and ending 1 year after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from anyone, unless the total value of the stock it bought is 5% or less of the total value of all its stock.

For more information about tests 6 and 7, see the regulations under section 1202 of the Internal Revenue Code.

Qualified small business. This is a C corporation with total gross assets of $50 million or less at all times after August 9, 1993, and before it issued the stock. The corporation's total gross assets immediately after it issued the stock must also be $50 million or less.
When figuring the corporation's total gross assets, you must also count the assets of any predecessor of the corporation. In addition, you must treat all corporations that are members of the same parent-subsidiary controlled group as one corporation.
Active business test. A corporation meets this test for any period of time if, during that period, both the following are true.

It was an eligible corporation, defined below.

It used at least 80% (by value) of its assets in the active conduct of at least one qualified trade or business, defined below.

Exception for SSBIC. Any specialized small business investment company (SSBIC) is treated as meeting the active business test. An SSBIC is an eligible corporation that is licensed to operate under section 301(d) of the Small Business Investment Act of 1958 as in effect on May 13, 1993.
Eligible corporation. This is any U.S. corporation other than:

A Domestic International Sales Corporation (DISC) or a former DISC,
A corporation that has made, or whose subsidiary has made, an election under section 936 of the Internal Revenue Code, concerning the Puerto Rico and possession tax credit,
A regulated investment company,
A real estate investment trust (REIT),
A real estate mortgage investment conduit (REMIC),
A financial asset securitization investment trust (FASIT), or
A cooperative.

Qualified trade or business. This is any trade or business other than:

One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services,
One whose principal asset is the reputation or skill of one or more employees,
Any banking, insurance, financing, leasing, investing, or similar business,
Any farming business (including the business of raising or harvesting trees),
Any business involving the production or extraction of products for which percentage depletion can be claimed, or
Any business of operating a hotel, motel, restaurant, or similar business.

***Beginning in 1998, you may have to pay tax on only one-half of your gain from the sale or exchange of qualified small business stock. This applies only to stock originally issued after August 10, 1993, and held by you for more than 5 years.

For more information, see Gains on Qualified Small Business Stock in chapter 4 of Publication 550.


"Jack"
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