NEW YORK (CNNfn) - With stocks tumbling and losses mounting, the natural reaction for taxpayers is to find a way to deduct those losses and have the IRS share your pain. But some of us want to have our cake and eat it too.|
We want to sell the stock, take the loss and then buy the same stock right back as if it were never really sold. This way we take the loss, but still have the stock. We do this in the hope that the stock increases in value and along the way, we get to deduct what only amounted to a paper loss and not in fact a real loss.
If this scenario sounds too good to be true...it is. That's why the Tax Code includes the wash-sale rule, which says that you cannot deduct the loss if you buy the same stock back within 30 days.
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So with this in mind, some smart IRA owners are asking if their IRA account presents an opportunity, maybe even a tax loophole. The answer is yes it does. You can sell a stock for a loss, deduct that loss and then buy that same stock back the next day in your IRA (or Roth IRA) and not run afoul of the wash sale rule.
What's my rationale for this position? Actually this has always been a gray area with nothing on this direct issue in either the tax law or IRS Regulations.
At first impression, my gut reaction would be that buying the same stock back in your IRA the next day (or within 30 days) is the same as you buying it back, and the wash-sale rule would apply, causing the loss to be disallowed. After all, what's the difference between you and your IRA? Apparently there is a difference and the wash-sale rule does not apply.
How do I know this? The IRS informal position from an IRS e-mail response to this very question says so, and based on their explanation I now agree that it can be done and the wash-sale rule does not apply when the stock is bought back in the IRA.
Read Ed Slott's columns on the three most important decisions you'll make with your IRA: Choosing a beneficiary, picking a life expectancy and picking a distribution method.
The IRS considers the sale of the stock in your taxable account and the repurchase of it in your IRA "two unrelated transactions." When you buy the stock back in your taxable account you create "basis," which at some point when you later sell that stock, will allow to reduce the gain or claim a loss.
When you buy the stock back in your IRA, you do not create basis, because all distributions (other than distributions of nondeductible IRA contributions) from that IRA will be fully taxable regardless of how much the stock was purchased for within the IRA.
Because you do not create basis in your IRA (other than for nondeductible IRA contributions), the IRS is not worried about you claiming a future loss on any stock purchased within your IRA. The only time you could possibly claim a loss on a distribution from your IRA would be when you have basis and even if you did have basis, the loss can only be claimed if your entire IRA account is withdrawn.
Another reason that the wash-sale rule does not apply to a repurchase of the same stock in your IRA is because you do not receive capital gains tax treatment on IRA distributions. All IRA distributions will be taxed as ordinary income.
A question that has been asked about this topic is "I bought stocks in my Roth IRA account last year. If I sell them at a loss this year can I take advantage of the wash-sale rule?"
Here the answer is clearly, no. There is no such thing as a wash-sale within an IRA because you cannot claim a loss when a stock is sold within an IRA. It works the other way as well. If you buy a stock in your IRA and sell it in your IRA at a huge profit, you do not pay current tax on that gain. No capital gains or losses are recognized in an IRA.
When the money is withdrawn from the IRA, the distribution will be taxed at ordinary income tax rates.