See? I’m still here. I’m just not getting paid.
Over the weeks to come, we’ll be tinkering with this and adding things—particularly a way to look at some (some!) of the 751 previous columns you may have missed.
Now, back to business . . .
From Cynthia: “Can I avoid the 30-day wash sale rule by trading through an IRA?”
No. Normally, if you have a loss in a stock, you can use it to offset other taxable gains and—once you’ve wiped out any gains—up to $3,000 a year in ordinary income.
So if you’re sitting with a loss, it’s tempting to “take” that loss by selling your shares. Lowers your taxes.
But often, you like that stock, and figure it’s an even better buy here, now that it’s lower, so you want to buy it right back.
Well, if you want that “loss” to stick, as far as the IRS is concerned, you have to wait 30 days before buying it back. (Nor can you “double up” by buying extra shares a day or two before selling. If you want to be able to take the loss, you have to wait 30 days after doubling up.)
Say you bought 300 shares of Blah-Blah Industries in 1968 at $50. Today, it’s just $20. You sell. That’s a $9,000 loss—$30 on each of 300 shares. Normally, you could deduct that loss against other gains and, if you still had some loss left over, up to $3,000 in ordinary income (with any excess carried forward to future years).
But not if you bought back some Blah-Blah shares before 30 days had elapsed. (And not if you had doubled up on your Blah-Blah shares any time within 30 days prior to your selling these shares.)
The sale is not considered real. You had 300 shares and now you still have 300 shares. So the IRS won’t allow the loss (until, ultimately, you go ahead and sell those “replacement” shares).
And buying them inside your IRA, if the IRS noticed, would probably be considered the same thing—you owned 300 shares, and now you still own 300 shares, albeit in a different, tax sheltered, account. So if you didn’t wait 30 days, the wash sale rule kicks in.
I couldn’t find anything in the tax law explicitly saying this, but a tax expert I know feels quite sure this is how the IRS would interpret its rules.
Nor does it work to sell the stock in your name and buy it back moments later in your spouse’s name—though it should be OK if your child or parent buys it.
Note: I’m not a tax expert. I disclaim any responsibility to do more than make a good faith effort to be helpful.
Cynthia goes on: “Also, can you just buy, sell, buy, sell, etc. without regard to the 30-day wash sale rule through an IRA because it all comes out as regular income anyway?”
Yes. You can buy and sell as often as you like within an IRA without triggering any tax consequences.
Finally: “Am I correct that you cannot realize capital gains upon an IRA distribution and have to take the proceeds as regular income regardless of how the thing has been invested?”
Yes again. Inside an IRA, a capital gain gets no favorable tax treatment, even when you begin withdrawing it.