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I have two brokerage accounts - One regular after tax cash account and one Roth. I have a stock in the cash account that is down about $2k. I remain bullish on this stock and want to own it for long term since it pays a nice divy.

My thoughts are to harvest the tax loss and sell in the cash account and buy in Roth. Side benefit in addition to tax loss, this makes future divy tax free.

My instincts tell me this would not activate the wash sale rule, but sometimes logic does not prevail in IRS matters.

I can wait the thirty days in between if I have to. But do I have to?

Thanks for any advice or experience.... Mike

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I have two brokerage accounts - One regular after tax cash account and one Roth. I have a stock in the cash account that is down about $2k. I remain bullish on this stock and want to own it for long term since it pays a nice divy.

My thoughts are to harvest the tax loss and sell in the cash account and buy in Roth. Side benefit in addition to tax loss, this makes future divy tax free.

My instincts tell me this would not activate the wash sale rule, but sometimes logic does not prevail in IRS matters.

I can wait the thirty days in between if I have to. But do I have to?

Thanks for any advice or experience....


This issue has been debated for years without resolution. The IRS has not provided any guidance on the issue. However, the wash sale rule may be the least of your worries. The IRS can deem this is a related party transaction and disallow the entire loss. A wash sale only defers recognition of the loss, with a related party sale, the loss is gone forever.

Ira

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This issue has been debated for years without resolution. The IRS has not provided any guidance on the issue. However, the wash sale rule may be the least of your worries. The IRS can deem this is a related party transaction and disallow the entire loss. A wash sale only defers recognition of the loss, with a related party sale, the loss is gone forever.

Ira


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Thanks Ira...

So if I sell in the cash account, when could I buy in the Roth? Could I ever and feel safe? <Rhtorical question that may not have an answer.>

It seems like the related party rule would forever threaten a loss taken in the cash followed by any buy in the Roth of the same security, even months or years later. Is there any time limit on related party transactions?

Mike, always mystified by some of these regulations...
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So if I sell in the cash account, when could I buy in the Roth? Could I ever and feel safe?

Warning: I'm not an expert in this stuff, so wait for some confirmation.

I'd say if you waited the 30 days which would allow you to rebuy while recognizing the loss, you'd be safe to buy in the Roth after that same 30 day period.

Phil
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A wash sale only defers recognition of the loss, with a related party sale, the loss is gone forever.

I had wondered how, if the wash sales rules applied to selling at a loss in a taxable account and buying in a Roth within a 30-days window (either before or after the sale), how one would ever realize the loss.

The "related party" sounds more applicable in this situation, again a good reason to try to avoid tripping the wash sales rule between taxable and tax-favored. (And in mutual funds, this would also apply to automatic reinvestment of dividends inside the tax-favored account, wouldn't it?)
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So if I sell in the cash account, when could I buy in the Roth? Could I ever and feel safe?

Warning: I'm not an expert in this stuff, so wait for some confirmation.

I'd say if you waited the 30 days which would allow you to rebuy while recognizing the loss, you'd be safe to buy in the Roth after that same 30 day period.


That would be my thought as well. IRS Pub. 544, Sales and Other Dispositions of Assets, discusses related party transactions, but doesn't discuss timing issues.

If you want to see what other knowledgeable professionals say on the matter, use groups.google.com and search the usenet group misc.taxes.moderated for "wash sale IRA" or similar terms.

Ira

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A wash sale only defers recognition of the loss, with a related party sale, the loss is gone forever.

I had wondered how, if the wash sales rules applied to selling at a loss in a taxable account and buying in a Roth within a 30-days window (either before or after the sale), how one would ever realize the loss.


You wouldn't, under current tax law. But, the principle would still apply. Your cost basis in the Roth IRA shares is adjusted under the wash sale rules. As of today, however, cost basis within the Roth IRA is irrelevant. Should tax laws change in such a way that cost basis within the Roth IRA becomes important, you would have to use the increased cost basis.

Ira
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Re wash sales in general, you can avoid the problem, of course, by waiting 30 days to replace the stock sold.

A much better approach, if you have available cash, is to buy the replacement stock first, then after 30 days have elapsed, sell the original stock. Notice what this does:

- If the price of stock remains pretty much unchanged during those 30 days, all is well - you've taken the desired loss and replaced the stock at more or less the same price, which is what you wanted to do anyway.

- If the price of the stock goes down, you realize an even bigger loss than you would have otherwise. Alas, you also have a loss on the newly purchased block of stock, but that's no big deal - after all, you're bullish on this stock, and expect it to rise over the long term. Just a bump in the road.

- If the price of the stock goes up, that's fine. You've got a gain on the replacement stock. Ok, the loss on the original block of stock isn't quite as large, but you've more than recouped that by selling at a higher price. (This last case is the one to worry about if you do things the usual way, selling, then waiting 30 days to rebuy. In that case, you're burned if you get a big runup in price. Doing it this way, that's a good result...)

Lorenzo
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I believe, the thirty days does not include the day of sale.

The thirty day window is before or after the sale. You are still more than 30 days from the end of the year. If you are truly bullish on the stock, you still have time to buy the replacement shares then wait the appropriate time before selling the existing shares in the taxable account.

Debra

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Thanks to all who responded. The advice certainly helped. It seems that I must obey the 30 day rule but have two ways to do it.

A. Sell in the after tax account, wait 30 days, buy in the Roth

B. Buy in the Roth, wait 30 days, sell in the after tax account

So I either am out of the position for 30 days or double up for thrity days. Of couse one of these is best based on what the stock does in the next thirty days. Thus the classic market timing deilema...

BTW, the stock is Fording Canadian Coal Trust - FDG
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BTW, the stock is Fording Canadian Coal Trust - FDG

You should be aware that FDG dividends are subject to Canadian withholding tax. You can claim the foreign tax credit for the tax on dividends on shares held in your taxable account, but not for the tax on dividends on shares held in your Roth IRA. You'll have to determine whether this is significant enough to affect your decision.

Ira
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I hate to tell you this, but you probably have a gain, not a loss in FTG. Depending on how long you have owned it you probablyl took a lot of depletion which reduced your basis, probably to less than today's market price. If that is true, you would have a gain, not a loss if you sold it. ed
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I hate to tell you this, but you probably have a gain, not a loss in FTG. Depending on how long you have owned it you probablyl took a lot of depletion which reduced your basis, probably to less than today's market price. If that is true, you would have a gain, not a loss if you sold it.

Ed, I don't think so. I, too, thought this might be the case, but the FTG website states that FTG has elected to be treated as a corporation and that distributions are qualifying dividends for US taxpayers (to the extent that the distributions are from earnings) and return of capital otherwise.

Ira
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Thanks for that insight, ira, but aside from the depletion issue FDG is selling at about 39 and it didn't ever sell at more than 39 (split adjusted) prior to September 05. So if OP held it longer than about 45 days he has a gain. He may be confused by the fact that it split. ed
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Thanks for that insight, ira, but aside from the depletion issue FDG is selling at about 39 and it didn't ever sell at more than 39 (split adjusted) prior to September 05. So if OP held it longer than about 45 days he has a gain. He may be confused by the fact that it split.

Very true. I hadn't looked at the stock's price history - I assumed that the OP knew whether the stock price was more or less than he originally paid for it, including the effect of splits. It's the other less common basis adjustments (such as dividend reinvestment, return of capital, depletion in natural resource trusts, etc.) that often trip people up.

Ira
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Thanks for that insight, ira, but aside from the depletion issue FDG is selling at about 39 and it didn't ever sell at more than 39 (split adjusted) prior to September 05. So if OP held it longer than about 45 days he has a gain. He may be confused by the fact that it split.

Very true. I hadn't looked at the stock's price history - I assumed that the OP knew whether the stock price was more or less than he originally paid for it, including the effect of splits. It's the other less common basis adjustments (such as dividend reinvestment, return of capital, depletion in natural resource trusts, etc.) that often trip people up.

Ira


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Ed and Ira - thank you for the thoughtful addendums. The fact that if I own in the Roth I cannot take the foreign tax credit for the 15% of the divy withheld by the cannucks really sucks and may change my strategy. I understand the effect of splits, etc on basis except for one item you mentioned: "depletion in natural resource trusts".

Could you elaborate on what this is all about and how it may be differentiated on the statements I receive.

thanks....mike
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Mike: Most oil/gas investments are limited partnership, trusts, or other forms or organization that are "pass through" entities. That is, you get a report( K-1, 1099, or whatever) at the end of the year telling you your gross income and deductions such as severance taxes, legal and accounting expenses, and a factor to figure your depletion. These are all deductions to get your net to put on 1040 line 17. The depletion, unlike other expenses, must be deducted also from your basis so you will effectively pay capital gains tax on it when you sell. Corporation do not report all that to you. They just pay a dividend. I'll take Ira's word for it on this issue, he's usually right. You will know from the annual report.

You can deduct the foreign tax withheld on the dividend on line 47 of the 2005 1040. If it's more than $300 single/ $600 MRJ you will have to complete a form 1116 to see how much you can take on line 47.

ed
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I'll take Ira's word for it on this issue, he's usually right.

No need to take my word for it. Here's the link to FDG's 2004 Tax Reporting information: http://www.fording.ca/cache/page_220-1536.html#Tax

Ira
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