Is The Wash Sale Definition Vague, Or Am I Reading It Wrong?
Is The Wash Sale Definition Vague, Or Am I Reading It Wrong?
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Shang Zhang · External communityPost link
External question — Personal Finance Stack Exchange
Author: Shang Zhang
Original post: https://money.stackexchange.com/questions/151957
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
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From Pub 550, page 56 (or so), "Wash Sales" is defined as:
"A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
...
Acquire substantially identical stock or securities in a fully taxable trade,
...
...
...
If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities ..."
Now consider this example: I bought one share of X at $100, then one day later I sold one share of X at $99, with both trades in my IRA account. Then after another day, I bought one share of X at $98 in my taxable account.
The IRS code seems to imply that 1) I sold a stock at a loss in my IRA account; 2) I triggered a "wash sale" because "I acquired an identical security in a fully taxable trade". And thus, the loss in my IRA account is added to my cost basis in my taxable account.
This sounds too good to be true. Am I mis-reading the IRS code?
Update: If I am mis-reading the IRS code, most likely it is due to this: "Loss" is not defined as the difference between purchase price and liquidation price, in a retirement account. And I actually never had a "loss" in the IRA account. But I would like to hear from someone who really knows the code.
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Hart CO · External communityPost link
External answer — Personal Finance Stack Exchange
Author: Hart CO
Original post: https://money.stackexchange.com/a/151959
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
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The IRS does not care about gains and losses within an IRA. The money was either already taxed, or will be taxed as income on withdrawal. Since there is not capital gain/loss in an IRA (as far as the IRS is concerned), there can't be disallowed loss and what you propose is not affected by wash sale rules. So, in your example you'd just be down $1 in your IRA, and have a share with $98 basis in your taxable account.
People have done the opposite, realizing a loss in a taxable account and immediately buying substantially identical equities in an IRA, but the IRS addressed this in
Revenue Ruling 2008-05
indicating that the loss would not be allowed and the basis in the IRA would not be adjusted.
Edit: I initially missed that the last transaction was in a taxable account.
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Quoted from Forex.com.bd-Editorial External question — Personal Finance Stack Exchange Author: Shang Zhang Source score (net votes, not local likes): 1 Original post: https://money.stackexchange.com/questions/151957 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. From Pub 550, page 56 (or so), "Wash Sales" is defined as: "A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: ... Acquire substantially identical stock or securities in a fully taxable trade, ... ... ... If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities ..." Now consider this example: I bought one share of X at $100, then one day later I sold one share of X at $99, with both trades in my IRA account. Then after another day, I bought one share of X at $98 in my taxable account. The IRS code seems to imply that 1) I sold a stock at a loss in my IRA account; 2) I triggered a "wash sale" because "I acquired an identical security in a fully taxable trade". And thus, the loss in my IRA account is added to my cost basis in my taxable account. This sounds too good to be true. Am I mis-reading the IRS code? Update: If I am mis-reading the IRS code, most likely it is due to this: "Loss" is not defined as the difference between purchase price and liquidation price, in a retirement account. And I actually never had a "loss" in the IRA account. But I would like to hear from someone who really knows the code.
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