Wash Sales Involving your IRA | Ed Slott and Company, LLC

Wash Sales Involving your IRA

The IRS has finally gone on record defining this rather popular strategy as a wash sale, confirming the opinions of many. http://www.irs.gov/pub/irs-drop/rr-08-05.pdf

By the same token, what if I personally own low-basis Boeing stock that I want to fund my Roth IRA with. IRA contributions can only be cash. So I sell my Boeing Stock, put the cash in a Roth and repurchase the same amount of Boeing stock, all within 30 days. According to the Treasury's reasoning. shouldn't that also be a "Wash" sale, and I should not have to report the gain?

The wash sale rules only apply to losses, not to gains. If you sell stock at a gain and repurchase it, the gain is taxable.

An interesting result of the ruling is that a wash sale on an IRA purchase is much more punishing than a regular wash sale, where the unrealized loss is only deferred by adding it to the cost basis of the replacement shares. With the IRA, there is NO increased basis available for the IRA and individual holdings carry no basis of their own, therefore the unrealized loss in the taxable account is permanent. Presently, there is no custodian information reporting that would disclose these transactions, so compliance will emanate from taxpayer honesty, IRS inquiries or IRS audit.

I, too, noticed that the lack of basis increase makes the result harsher where the repurchase is in an IRA. The question of whether the wash sale rules apply in the case of a repurchase in an IRA has been discussed on and off for many years, both on various listservs and among lawyers informally. Lawyers seemed to be divided in their views. In addition to the cases cited in the ruling, I think there are some old cases from before the enactment of the predecessor to the present Section 1091 in which the concept of a wash sale was applied. For that reason, I always thought that there was a significant risk that the wash sales would apply in the case of a sale followed by a repurchase in an IRA. I think that the reason this has never been the subject of a reported case is that the IRS generally doesn't review the brokerage statements for the IRA.

I see alot of clients where they use a different investment advisor for their IRA money and their non IRA money. I presume this new ruling could result in inadvertent disqualification of a loss since the investment advisors are unaware of what each is buying and or selling. Hard to see how this will be policed if accounts are at different broker dealers Finally I would think ruling applies to people with self directed 401K plans who can buy individual stocks in their accounts as well. Howard

Good point about the different account managers, and some of them might use this to justify a more aggressive approach to getting control of all a client's assets. That is those that get the message about this PLR, and most of them probably will not hear about this anytime soon. While the PLR only references IRAs, the rationale certainly suggests that this ruling could be applied to all tax deferred accounts, but there may be technical reason why the IRS cannot expand beyond the particular case at hand.
 

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