Tax planning and compliance for investors
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By Kaye A. Thomas
Posted December 20, 2007
You lose your deduction if you buy replacement shares in your IRA.
The wash sale rule says you lose your deduction for stock sold at a loss if you buy identical shares within 30 days before or after the sale. Some people have suggested you can avoid the wash sale rule if you sell shares at a loss in a regular brokerage account and, at the same time, buy replacement shares in an IRA. The idea is that the IRA is a distinct "person" for tax purposes, and the wash sale rule shouldn't apply if the replacement shares are bought by a different person.
For many years we've said here that this idea doesn't work. There's ample authority for the notion that a planned purchase of replacement shares by a related person will prevent you from deducting a loss. And the IRA is, of course, a related "person." Yet some people persisted in recommending the transaction in the absence of a direct authority applying this rule to an IRA. Now the IRS has published a ruling (Rev. Rul. 2008-5) that lays down the law: you lose your capital loss deduction if you use this strategy.
The ruling specifies, in addition, that you do not obtain an adjustment to the basis of your traditional or Roth IRA when the rule applies. That means — as we've often warned here — the result is worse than a normal wash sale, because the loss is permanently disallowed rather than being added to the basis of the replacement shares.
This rule will continue to be difficult for the IRS to enforce. Purchases and sales occurring within an IRA are not reported on Form 1099-B and will not show up in your individual brokerage account statement. Yet the ugly consequence — permanent disallowance of the deduction — may serve as a deterrent even for people who might otherwise be inclined to play the audit lottery.
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