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I know you're not allowed to sell a stock for a loss, take the deduction, and yet buy it back within 30 days.

However, are you allowed to do it if the stock is sold for a loss in a taxable account, but then buy it back in an IRA?? Or could you sell it from your account, but buy it back in your spouse's account (on a joint return)? Thanks to anyone who can help!
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However, are you allowed to do it if the stock is sold for a loss in a taxable account, but then buy it back in an IRA??

We've done this one to death. Short answer: there is no answer, but we think not.

Pour yourself a big cup of coffee (or other liquid refreshment of your choice), and search the archives on "wash and IRA."

Phil
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334000. Ask yourself, Are these entities "related parties"? Do you think it is that easy to get around a tax prohibition? Why did you think to ask? Why won't the IRS answer the IRA/Wash sale question in writing in their forms and instructions? Do you really need to do these transactions within 31 days of each other in exactly that same stock? Did you try to find an answer from the archives of this or any tax board? ed
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...Or could you sell it from your account, but buy it back in your spouse's account (on a joint return)? Thanks to anyone who can help!

Nope. Can't do this either. From IRS Pub. 550, Investment Income and Expense, pg. 55, "If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale."

Ira
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334ooo:

The regulars have probably indeed done this to death and as a result of that and April 15 are starting to get a little testy.

I am relatively new to the board so I will answer your questions:

Q. However, are you allowed to do it if the stock is sold for a loss in a taxable account, but then buy it back in an IRA??

A. In my view, yes. An IRA is a trust and while you may have some control over that trust both as its grantor and presumptive beneficiary, it remains a separate legal entity and - more importantly -an entity that the IRS will recognize for purposes of severing its taxable income from yours and thus defering its recognition to a later time. All the otherwise tax relevant characteristics of taxable transactions in an IRA (dividends, capital gain, rent, return of capital, etc.) are ignored and any distribution is uniformly characterized as pension income. Moreover, all other events in an IRA that would have current tax consequences are ignored. For example, income earned in the IRA is not counted towards AGI for AMT purposes or MAGI for purposes of qualifying or disqualifying any number of credits, exemptions, etc. Accordingly, my logic tells me that if you sell security A at a loss on your own (taxable) account but buy it back within 30 days in an IRA (for whatever reason) you may claim the tax loss because the buy-back event in your IRA is of no current tax relevance to you (win, lose or draw).

Q. Or could you sell it from your account, but buy it back in your spouse's account (on a joint return)?
A. Now, really, what do you think?
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ONuallainxx, thanks for the reply. I think your reasoning sounds great on the first question; I hope the IRS agrees.

As to everyone else, I wasn't trying to be lazy or waste your time. First, I've never been on this board before (but AM impressed by the warm welcome!) so I didn't know this had been beaten to death. Secondly, I do not know how to even go about doing a search of the archives. If anyone has the patience to help a discussion-board-babe, I'd appreciate it. Thanks!
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I would suggest you put IRA wash sale into the search engine here and on google and fairmark and see what they say. You want to ageee with ONuallainxx but consider that if he's wrong the loss isn't just deferred, it is LOST forever because, as he says, there is no function in the IRA for recovering it. The IRA may be exempt, but the purchase by a related party is not. Do you think you have a "relationship" with your IRA (versus my IRA)? Do you direct what it buys and sells? Does it exist for anyone elses benefit but yours? Thimk. ed
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I do not know how to even go about doing a search of the archives.

There's probably an easier way, which you might find in the Help, but the following has worked for me.

At the top of this page there's a "search" box. Put your search terms in there and click. You'll have an "advanced search" option on the response page. (The direct search looks at only the last 6 months.) There you can choose from archived years. IIRC we had our big discussion of this in 2002.

Phil
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<<consider that if he's wrong the loss isn't just deferred, it is LOST forever because, as he says, there is no function in the IRA for recovering it. <<

Huh?

Recover what?

I think you need to reread the original question. The lost transaction assumed was outside the IRA, not in it.

<<The IRA may be exempt, but the purchase by a related party is not. Do you think you have a "relationship" with your IRA (versus my IRA)? Do you direct what it buys and sells? Does it exist for anyone elses benefit but yours? Thimk. ed <<

An IRA is not a related party as that term is specially defined in the tax code.

With respect to taxable events and transactions taking place outside it, the IRA is a "black box" whose contents and events are opaque, discrete and unrelated to any such exterior transactions. Provided that the transactions taking place within it do not violate the rules governing its own little universe, nothing that takes place within an IRA can be of any tax significance to its grantor unless and until it emerges and plops down on the pension income line of his or his beneficiary's form 1040.

Were your logic to be followed, "shadow income" in IRA's could theoretically affect the calcutions of AGI, MAGI and God knows how many other threshold limitations and/or phase-outs affecting regular and AMT taxes that are now floating around out there in the non tax deferred world. Your approach would necessarily eliminate many of the public policy considerations underlying IRA's and add an element of intractability and obtuseness to a tax code that is already approximating the limits of tolerable confusion.

I add to the dictates of my logic one more practical observation:

If I'm wrong ain't no one at the IRS ever gonna find out about OP's laundered loss.
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I add to the dictates of my logic one more practical observation:

Logic?! I gave up the myth that logic has anything to do with tax law years ago.

BTW, I am on the same side of this issue as you, but because of equity. While the law may not concern itself with equity, the courts often do. Since this issue hasn't been litigated we don't know what the courts would do, but we do know that the IRS hasn't brought itself to stake a formal position in a reg.

If I'm wrong ain't no one at the IRS ever gonna find out about OP's laundered loss.

This sound too much like "Well, you can't do it, but it's unlikely that they'll catch you, so let's play audit roulette." Granted, my experience as a tax collector no doubt clouds my judgment, but this sounds smarmy to me.

Phil
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<<This sound too much like "Well, you can't do it, but it's unlikely that they'll catch you, so let's play audit roulette." Granted, my experience as a tax collector no doubt clouds my judgment, but this sounds smarmy to me.<<

A well-argued position based upon public policy, clear logic, the language of the code and regulations, coupled with instructive and supporting judicial decisions on the issue and nothing to the contrary from any quarter strikes me as anything but "smarmy". I would estimate it has a 95% chance of success.

Circular 230 is the Bible on smarmy and they rate an estimated 95% probability of success as the ethical equivalent of 6 empty chambers and a trigger lock.

And furthermore: (Yawn)

I apologize to 3334ooo for too cavalierly dismissing the possibility that a loss sale by him and a later repurchase by his wife within the 61 day wash sale period would NECESSARILY be disallowed as a wash sale - even on a joint return.

For anyone interested, the relevant Internal Revenue Code provision governing wash sales is § 1091. As Edcosoft points out, the Treasury secretary has made little use of the regulatory authority granted. As a result, the implementing regulations are brief and sparse. They also look to be about 50 years old - i.e. before IRA's were even a gleam in a mutual fund salesman's eye.

In 1947 - i.e. before Title VII and bra-burning became popular - the U.S. Supreme Court ruled in J.P. McWilliams v. Commissioner that where a husband who managed his wife's estate would order his broker to sell the stock of one of them and to buy the same number of shares at as nearly the same price as possible for the other, losses were disallowed on the ground that they were losses on indirect sales between related parties.

The Board of Tax Appeals cases prior to that decision appear to have been pretty evenly split on the issue.

It is not clear that when those cases were decided that §1091 or a functionally equivalent predecessor even existed. It was introduced in 1955.

According to CCH's SFTR, to this day there remains the theoretical possibility that a husband's loss will NOT be disallowed by a wife's repurchase of the same or similar securities within the 61 day time period.

In order to avoid disallowance, however, I would suggest that the taxpayer would have to establish at a minimum 1) that the two transactions took place in accounts that were separately owned by H and W, 2) that both H and W independently managed their own assets and accounts and 3) there was no element of dominance, control, coercion or 4) colusion between the spouses. (I believe that absent the existence of a guardian-ward relationship, political correctness, Title VII and the 14th Amendment will conclusively establish the 3d element or at least shift the burden to the Service.)

As far as non-IRA trusts are concerned, the only case law on point I could find (a pre-1953 Board of Tax Appeals case) is one that says, not surprisingly, that a repurchase by a trust, created by the taxpayer, over the personal property of which he had “ABSOLUTE DOMINION” came within the wash sale rules.

Manifestly, an IRA owner/beneficiary does not have the “absolute dominion” referred to by the BTA case.

There is one more technical problem involving the wash sale rule that would seem to militate in favor of ignoring a repurchase that takes place within the confines of an IRA: it will be the sale of the repurchased security and its adjusted basis that will ultimately establish the gain or loss recognized. In other words, if repurchase in an IRA were held to come within the wash sale rules, the subsequent sale of that stock - still within the IRA - would trigger currently recognized gain or loss outside the IRA yet would not be subject to informational return reporting by the IRA trustee.

Consider the following scenario: TP buys stock for $100 on 1 Feb 2001 and sells on 1 March 2003 for $80. He buys the same quantity of the same stock in his IRA on 21 March 2003 for $90.

In the opinion of Edcosoft (and apparently others on this board), the wash sale rules would apply and TP's $20 loss would be disallowed. But under their logic, there is now stock in the IRA account with an adjusted tax basis determined under the wash sale rules of $110 ($90 plus $20 loss disallowed).

Since they theorize that events within an IRA can nullify the tax effects of transactions executed outside the IRA, the converse must also be true: i.e. the subsequent sale of those shares within the IRA may trigger a tax event outside the IRA, i.e. recognized gain or loss in the year of sale.

Proponents of Edcosoft's theory will say that cannot happen under IRA rules but they cannot have it both ways. Either the IRA is a discrete tax universe or it is not.

Their theory would bridge the gap between those systems, inextricably intermingle them and thereby frustrate the public policy that led legislatures to create IRA's in the first place.


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<Since they theorize that events within an IRA can nullify the tax effects of transactions executed outside the IRA, the converse must also be true: i.e. the subsequent sale of those shares within the IRA may trigger a tax event outside the IRA, i.e. recognized gain or loss in the year of sale.

Proponents of Edcosoft's theory will say that cannot happen under IRA rules but they cannot have it both ways. Either the IRA is a discrete tax universe or it is not.>

Onuallainxx:

Thank you for taking the time to plainly state your case. This one has gone round and round here for a long time now. I agree with Phil and others that it is always dangerous to apply the word logical to anything involved with the tax code. I also agree with the general sentiment that a wash sale in differently titled taxable accounts could be a difficult argument to make (although from your references one could still attempt to do so).

Regarding the IRA, I stand shoulder to shoulder with you. The tax codes are monstrous enough already. I believe that those taking the opposite postion are reading things into it that just aren't there. Whether an individual holding within my IRA becomes a 10 bagger or runs down to zero is of no interest to the IRS. If my dividends are qualified, not qualified, a return of capital, a section 1250 or a distribution of any other kind is irrelevant to the IRS (and me too). Whether I have held for 10 minutes or 10 years does not matter to them. Everything that goes on within the IRA is self contained. The only time that anything becomes an issue is when I take a distribution out of the account. Then the IRS becomes very interested and I had better follow the guidelines closely. Note that for this argument I am assuming that one has a somewhat diversified IRA and didn't go with 100% Enron or WorldCom stock. I will admit that those stupid enough to put every penny of their IRA into a stock that goes to zero could generate a modest loss covering their original contributions. I am leaving those few and hopefully far between IRA holders out of this discussion.

Your example of the share sale and purchase is a good one. Your conclusion is right on the money. Either the IRA is self contained or it is not. If one decides that it is not, then I would guess that Linda Blair's famous head spin will be nothing compared to the spinning heads that would occur to millions of IRA holders. If a purchase inside an IRA can have an effect on tax considerations outside of it, then the sale of that same holding at a later date should also be a relevant event. Of course as things stand now (and since IRA's were created), there is absolutely no reporting mechanism of any kind for all such transactions. Attempting to report such a transaction on your 1040 would probably cause immense confusion and irritation for the IRS employee trying to process your return. I believe that doing so would greatly increase your odds of an audit as you would be supplying information that the IRS cannot match up with any of the data that your brokerage firm reported to them.


BRG
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"Everything that goes on within the IRA is self contained. The only time that anything becomes an issue is when I take a distribution out of the account. "


Hi. I'm new here. Previous posts here and elsewhere have made it pretty clear that Master Limited Partnerships (MLPs) held within an IRA expose said IRA to the possibility of having to pay Unrelated Business Income (UBI) tax if that UBI is greater than $1000. See http://boards.fool.com/Message.asp?mid=20437973 .

While I'd like to believe that what goes on within the IRA is self-contained, the potential tax liability for UBI from MLPs makes me think transactions here may be considered as part of a wash sale.

I'm not a tax professional. I didn't even sleep in a holiday inn last night. So take this for what its worth.

jaloti
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Hi. I'm new here. Previous posts here and elsewhere have made it pretty clear that Master Limited Partnerships (MLPs) held within an IRA expose said IRA to the possibility of having to pay Unrelated Business Income (UBI) tax if that UBI is greater than $1000. See http://boards.fool.com/Message.asp?mid=20437973 .

While I'd like to believe that what goes on within the IRA is self-contained, the potential tax liability for UBI from MLPs makes me think transactions here may be considered as part of a wash sale.


Actually, the UBIT issue is irrelevant to the wash sale discussion. If an IRA becomes subject to UBIT because of investments held within it, the tax is assessed on the IRA, not the beneficiary of the IRA.

Ira

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ONulexx: That was a really astute disertation, however there two things you assumed as fact, which aren't.

I think you need to reread the original question. The lost transaction assumed was outside the IRA, not in it.

The problem is the taxpayer did something that was prohibited outside of the IRA by what he did inside the IRA. The IRA is a black box, but what the taxpayer DOES is the problem. His problem is not that he created a problem in the black box but that he threw his loss into a black box.

<<The IRA may be exempt, but the purchase by a related party is not. Do you think you have a "relationship" with your IRA (versus my IRA)? Do you direct what it buys and sells? Does it exist for anyone elses benefit but yours? Thimk. ed <<

An IRA is not a related party as that term is specially defined in the tax code.

Sorry but you evidently haven't read what a "related party" is per Pub 550 page 47. It's between the Grantor and Fiduciary or Fiduciary and Beneficiary of a Trust. I think you're all three of those, let alone just 2. Also "A tax-exempt....organization controled by you, or....".

Do you really think you have no relationship to, or control over, your IRA? But the crux is that you sold the stock and you directed the IRA to buy it. Your intent was to take a loss and preserve your position in the stock which is EXACTLY what the wash sale and related party rules were created to prevent. Good luck. ed
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Not that I entirely agree with the argument myself, and more to play devil's advocate, here's my understanding of the "wash sale does apply to an IRA" argument.

Code section 267 is often referred to for its list of related persons. Included in the definition of related persons are: the fiduciary of a trust and its grantor, and the fiduciary and beneficiary of a trust (IRC 267(b)(4) and (6), respectively).

An IRA is, at its core, a trust agreement. You, as an IRA "owner" are both its grantor and primary beneficiary. Based on the code, you and your IRA are related persons.

Now, here's where the official guidance ends and interpretation begins.

In general, the tax code takes a careful look at transactions by related parties, especially when the transaction results in one party recognizing a loss (or deduction).

The gist of the wash sale rules is to deny a loss deduction when you haven't economically realized the loss. If you sell a stock at a loss and immediately repurchase it in your IRA, you have not significantly changed your economic situation. You are, after all, a related party to your IRA, and will realize the economic benefits of the IRA. All you have done is recognize a loss when you haven't yet realized that loss (because you repurchased the stock).

Based on the spririt of the law, you have done something that congress doesn't want you to do - recognize a loss when you haven't changed your economic position. You are, by definition clearly in the code, a related party. So it seems to me that the IRS could make a decent argument for disallowing the loss.


The question then arises, what to do with the disallowed loss.

ONuallainxx's solution is one option: recognize the loss when the IRA disposes of the stock. This, however, raises the reporting issues that he (she?? I really don't know, sorry) so clearly pointed out. There are, however, other possibilities.

My personal favorite is that the disallowed loss gives rise to basis in the IRA, much like a non-deductible contribution to an IRA. The methods for handling that basis are quite clear - it is up to the taxpayer to keep track of their basis and recover that basis when distributions are made from the IRA.

Of course, this only helps with a traditional IRA. In a Roth IRA, it would seem that the loss would disappear forever - a fallout of the non-recognition of income earned by the Roth.

Another possibility is that the disallowed loss is just gone. The basis of the stock in the IRA would be increased over the purchase price. But because the IRA doesn't pay taxes on it's gains, that basis increase doesn't help.

I can't find any guidance of one over the other. But as has already been pointed out, courts are more concerned with equity than congress. Given that, and given that delay in recognition of a loss until it is economically realized is not inequitable, I think that the second option (my personal favorite) is not entirely unreasonable.

I think it is very reasonable for the wash sale rules to apply to a sale by an individual and repurchase by that individual's IRA, and that the disallowed loss would be recognized as distributions are made from the IRA.

--Peter
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<But the crux is that you sold the stock and you directed the IRA to buy it. Your intent was to take a loss and preserve your position in the stock which is EXACTLY what the wash sale and related party rules were created to prevent.>


So please explain to us the mechanism for finally taking the loss when, say three years later you sell the same stock in your IRA? One would be attempting to take a loss when the IRS considers no sale to have even taken place. I can't imagine a quicker way to raise a red flag than to claim a loss on a non existant sale.

If you say that one can't claim the initial loss and can't claim it later on either, that makes even less sense than the original argument does. Every year I have to reconcile all of my sales that are reported by my brokerage firm to the IRS. How does one reconcile something that is never reported on either the buy side or the sell side? The new buy may or may not provide a benefit as it can go up, down or sideways. So if our buyer ends up with an even bigger loss when he sells within his IRA, how does he claim it? If he is penalized for selling it at a loss within the IRA how can he also be penalized for buying it within the IRA in the first place?

I agree with the prior poster that an IRA is either a separate entity or it is not. It cannot be both. Either every single transaction within every single IRA needs to be reported to the IRS each year or none do. To date, for all of the millions of IRAs and the tens of millions of transactions that have gone on within them, none have been reportable. My educated guess is that requiring all IRA transactions to be reported will cost the IRS lots of money (and man hours) that they just don't have in their budget. At the same time this will surely be a net loser as far as revenue goes. I see this as a zero sum game. If I have a 5k loss that is disallowed this year, it will just carry over until my sale date. In the interim it may remain the same, get larger or result in a reduction of my CG.

The prior poster makes a good case for sales and buys within differently titled accounts. Intuitively, I feel less inclined to support such a postion. Yet, the case history he presented was very interesting. I enjoyed reading another POV on the subject.


BRG
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One would be attempting to take a loss when the IRS considers no sale to have even taken place. I can't imagine a quicker way to raise a red flag than to claim a loss on a non existant sale.

That happens all the time with worthless stocks. Unless the IRS is running around keeping track of who is going BK, they don't have anything to match to on those dispositions.

And what about the many private transactions that are taxable but not reportable? Just because a transaction isn't reported on a 1099 doesn't mean that the IRS will question it.

--Peter
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<That happens all the time with worthless stocks.>


Yes, but in such a case the taxpayer had better be sure he has either of two things:

1. A confirmation from the broker saying something like "all shares were sold for one dollar"

2. A formal letter from the company or the courts stating that the shares are worthless as of a specific date.


Lots of taxpayers confuse the generic term "worthless" with the legal one. There is a difference. I am not sure what the filing requirements are, but I would consider including a copy of such a letter with my return. This would be especially true if I was taking a rather large loss without a corresponding sale that my brokerage firm would be reporting to the IRS. One of the lessons my CPA taught me was to avoid any descrepancies that you may have with information that the IRS will be matching up with your return. If they can't be helped, you should be prepared to clearly and easily explain them.


BRG
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1. A confirmation from the broker saying something like "all shares were sold for one dollar"

But that would be a sale reportable on a 1099-B.

2. A formal letter from the company or the courts stating that the shares are worthless as of a specific date.

News articles (for larger or locally significant companies) and publically available court documents are more likely. If the company is worthess, they typically don't have any money to pay the postage to mail a letter to shareholders. (Is that too many "to"s in one sentence?) And courts don't like to communicate with anyone that isn't a party to the case at issue. They let the attorneys for the respective parties take care of that communication. Attorneys for BK companies are very aware of their client's financial position, and make sure they get paid before anything else. If the choice is paying for postage and paying their legal fees, guess which one wins?

--Peter
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The posts after my last one seemed to miss my point that this isn't a wash sale so much as a "related party sale" where the loss is NEVER recovered. It is just plain old denied! This makes trying to figure out how the IRA will finally cough up the loss immaterial because it isn't a wash sale, or, rather, it is both a wash sale and a related party sale. By the way the 31 days isn't a factor in a RPSale and the RPSale rules make the wash sale rules redundant.

I can understand all the technical arguments against my position, and I'm usually a champion of interpretation in favor of the taxpayer if the IRS can't claify an issue adequately but this is so blatently against Legislative INTENT that I wish you well if you want to try to take the loss. There's always the excuse you didn't know about these rules and you had a different motive in mind, etc etc. and as was pointed out, you'll probably never be caught becuase the purchase is hidden in an IRA and not disclosed on your taxable records. ed
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<But that would be a sale reportable on a 1099-B.>


Yes, but that would not happen unless and until you initiate an action like this. If you had a 20k investment that was trading on the pink sheets and was worth a grand total of 1.95 it may seem to be worthless in most people's eyes, but it is not yet worthless from a tax or a legal POV. You would not be able to declare the loss without either arranging a buy or having a formal declaration of worthlessness. It may seem like a technicality, but you still need to have something to back you up to make your loss official.

It is not always true that a bankrupt company will be gasping for air. On the contrary some very high visability companies have been able to screw lots of people over and wipe the slate clean. The most recent one is WorldCom and their 74 billion (with a B) write down of their debt and prior good will which was on the books. When they emerge from BK in the next few months I don't think they will be having any problems paying for their postage or anything else for that matter. Their clean balance sheet should even give them an advantage over some of their competitors who will not be able to erase their debts.


B
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<<Sorry but you evidently haven't read what a "related party" is per Pub 550 page 47. It's between the Grantor and Fiduciary or Fiduciary and Beneficiary of a Trust. I think you're all three of those, let alone just 2.<<

The fiduciary with IRA is the trustee (referred to in IRA speak as the IRA "custodian"). By law, that person may NOT be the grantor/beneficiary of the IRA.

But the IRA is a not an ordinary common-law trust. It is a creature of statute and as such is whatever the Congress of the United States says it is.

Pubs are nice, frequently helpful and usually correct but they are not the most authoritative source for the law.

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<<The posts after my last one seemed to miss my point that this isn't a wash sale so much as a "related party sale" where the loss is NEVER recovered. It is just plain old denied! This makes trying to figure out how the IRA will finally cough up the loss immaterial because it isn't a wash sale, or, rather, it is both a wash sale and a related party sale. By the way the 31 days isn't a factor in a RPSale and the RPSale rules make the wash sale rules redundant. <<

Edcosoft,

You make an excellent point. The related party sale prohibition of §267 appear to have ante-dated the wash sale rules by several decades.

As I noted in my earlier post, the Supreme Court was interpreting §267 (or its granddaddy) and not the wash sale rules when it wrote its decision.

As far as §267 making §1097 redundant, the rule of statutory construction is that laws shall be interpreted as if the Congress intended them to have meaning (here is where judges and lawyers snicker in chorus).

The relationship between the two is interesting and I will explore it further to satisfy my own curiosity.

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...but this is so blatently against Legislative INTENT that I wish you well if you want to try to take the loss.

If by 'intent' you mean preventing a taxpayer from using a capital loss either to offset capital gains or $3K of ordinary income/year while retaining the underlying asset and deferring payment of cap gains tax on any future appreciation, then I don't agree with you. What I just described is deferring tax liability at the capital gains rate, and IMHO, this is what the IRS intended to prohibit. In the case under discussion, any future appreciation would be taxed at ordinary income rates, which are almost always higher than cap gains rates--IOW, the IRS still gets their due--although the tax payment might be deferred, when it's paid, it's paid at a higher tax rate.

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