Wash Sale custodial account?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
drramey
Posts: 62
Joined: Sun May 16, 2021 12:00 am

Wash Sale custodial account?

Post by drramey »

I know the purchase of an identical security in a spouse’s IRA can cause a wash sale. Would a dividend reinvestment in my daughters custodial account trigger one? Her sole holding is in VTI with dividends reinvested. If I use VTI for TLH is that an issue?
placeholder
Posts: 8421
Joined: Tue Aug 06, 2013 12:43 pm

Re: Wash Sale custodial account?

Post by placeholder »

There's nothing in the irs publications about it that I've ever seen.
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: Wash Sale custodial account?

Post by lakpr »

I had argued on these forums in the past, that inuding one's 401k plan into the Wash Sales rules is being "holier than the pope" -- nothing in the IRS publications mention about workplace retirement plans. Only taxable accounts and IRAs, for both spouses + business accounts controlled by either spouse. That is it.

I get roundly criticized saying I should be looking at congressional intent in framing the law. But come on! Was the loophole regarding backdoor Roth not against congressional intent?

I am digressing, but the point I wanted to make -- don't aspire to be holier than the pope. Stick to the letter of the law, don't divine the congressional intent. IRS clearly has not mentioned custodial accounts in any of its publications (@placeholder mentioned this already and I concur), try not to complicate your life by overanalyzing.

In some sense, the custodial accounts are the property of the minor. You are not the owner, only a custodian. Imagine that you are the chief financial officer of the place where you work or the non-profit where you volunteer. Assume you invested that organization's assets into VTI. Does harvesting losses in VTI in your personal account make you subject to wash sales rules just because your workplace/volunteering place also invests in VTI? I would think that makes zero sense.

Then again, I am not a lawyer, much less a tax lawyer. Just a random guy on the internet. Take this advice with a pound of salt.
Gill
Posts: 8221
Joined: Sun Mar 04, 2007 7:38 pm
Location: Florida

Re: Wash Sale custodial account?

Post by Gill »

lakpr wrote: Sat Jun 19, 2021 3:40 am I had argued on these forums in the past, that inuding one's 401k plan into the Wash Sales rules is being "holier than the pope" -- nothing in the IRS publications mention about workplace retirement plans. Only taxable accounts and IRAs, for both spouses + business accounts controlled by either spouse. That is it.

I get roundly criticized saying I should be looking at congressional intent in framing the law. But come on! Was the loophole regarding backdoor Roth not against congressional intent?

I am digressing, but the point I wanted to make -- don't aspire to be holier than the pope. Stick to the letter of the law, don't divine the congressional intent. IRS clearly has not mentioned custodial accounts in any of its publications (@placeholder mentioned this already and I concur), try not to complicate your life by overanalyzing.

In some sense, the custodial accounts are the property of the minor. You are not the owner, only a custodian. Imagine that you are the chief financial officer of the place where you work or the non-profit where you volunteer. Assume you invested that organization's assets into VTI. Does harvesting losses in VTI in your personal account make you subject to wash sales rules just because your workplace/volunteering place also invests in VTI? I would think that makes zero sense.

Then again, I am not a lawyer, much less a tax lawyer. Just a random guy on the internet. Take this advice with a pound of salt.
Completely agree. Let’s not stretch this principle beyond all reason.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Tanelorn
Posts: 2370
Joined: Thu May 01, 2014 9:35 pm

Re: Wash Sale custodial account?

Post by Tanelorn »

lakpr wrote: Sat Jun 19, 2021 3:40 am I had argued on these forums in the past, that inuding one's 401k plan into the Wash Sales rules is being "holier than the pope" -- nothing in the IRS publications mention about workplace retirement plans. Only taxable accounts and IRAs, for both spouses + business accounts controlled by either spouse. That is it.

I get roundly criticized saying I should be looking at congressional intent in framing the law. But come on! Was the loophole regarding backdoor Roth not against congressional intent?

I am digressing, but the point I wanted to make -- don't aspire to be holier than the pope. Stick to the letter of the law, don't divine the congressional intent. IRS clearly has not mentioned custodial accounts in any of its publications (@placeholder mentioned this already and I concur), try not to complicate your life by overanalyzing.

In some sense, the custodial accounts are the property of the minor. You are not the owner, only a custodian. Imagine that you are the chief financial officer of the place where you work or the non-profit where you volunteer. Assume you invested that organization's assets into VTI. Does harvesting losses in VTI in your personal account make you subject to wash sales rules just because your workplace/volunteering place also invests in VTI? I would think that makes zero sense.

Then again, I am not a lawyer, much less a tax lawyer. Just a random guy on the internet. Take this advice with a pound of salt.
Yes, 401k are trusts owned by the company and careful views on that suggest there’s not any tax law or IRS ruling that would generate wash sales between one’s personal accounts and ones 401k. Likewise custodial accounts are totally separate ownership with no evidence it would be applied there.

I also agree that there’s a sentiment here that people “should” pay more taxes rather than following the actual law, and that’s weirdly unjustified. I think that’s a function of the way comments here are all viewed equally (with no ranking or voting to support the good ones), so an actual tax lawyer commenting are worth less than a handful of uninformed posters who would rather express their political views by saying better off people should take an overly strict reading of the tax law. Judge Learned Hand famously wrote: “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.”
User avatar
Wiggums
Posts: 7051
Joined: Thu Jan 31, 2019 7:02 am

Re: Wash Sale custodial account?

Post by Wiggums »

drramey wrote: Fri Jun 18, 2021 11:45 pm I know the purchase of an identical security in a spouse’s IRA can cause a wash sale. Would a dividend reinvestment in my daughters custodial account trigger one? Her sole holding is in VTI with dividends reinvested. If I use VTI for TLH is that an issue?
I never had this issue before. It does seem reasonable or likely for the tax law to be applied to such accounts.
"I started with nothing and I still have most of it left."
HootingSloth
Posts: 1050
Joined: Mon Jan 28, 2019 2:38 pm

Re: Wash Sale custodial account?

Post by HootingSloth »

When thinking about this kind of issue, I suggest folks read the reasoning of Revenue Ruling 2008-5 and come to their own conclusions. Here is an excerpt:
In Security First National Bank of Los Angeles, 28 BTA 289 (1933), the taxpayer sold bonds (at a market price) to a corporation of which the taxpayer was the sole shareholder. On the same day, in exchange for land, the corporation transferred the same bonds at the same price to a trust over which the taxpayer had absolute dominion and control. In finding that § 214(a)(5), the predecessor to § 1091(a), applied to disallow the loss, the court reasoned as follows:

The [taxpayer] did not personally reacquire substantially identical property and, strictly construed, the language of section 214(a)(5), above referred to, might not apply. However, the rule of strict construction should not be unduly pressed to permit easy evasion of a taxing statute. Carbon Steel Co. v. Lewellyn, 251 U.S. 501. Unless the respondent is right, a trust like this one could be used deliberately to accomplish the very thing which Congress intended to frustrate. ... Although title to the bonds was acquired by the trust, actual command over the property was still in the [taxpayer]. …The difference between acquisition by him personally and acquisition by the trust amounts only to a refinement of title and may be disregarded so far as section 214(a)(5) is concerned.

Security First National Bank, 28 BTA at 314 - 315.
Applying this reasoning to the facts of this ruling, even though an individual retirement account is a tax-exempt trust, A has nevertheless acquired, for purposes of § 1091(a), 100 shares of X Company stock on December 21, 2007, by virtue of the Purchase. See also Shoenberg v. Commissioner, 77 F. 2d 446 (8th Cir. 1935).
This, and not the publication frequently mentioned on here, is the actual guidance with legal effect that the IRS has produced.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
lazynovice
Posts: 3369
Joined: Mon Apr 16, 2012 10:48 pm
Location: Denver area. Former Texan.

Re: Wash Sale custodial account?

Post by lazynovice »

HootingSloth wrote: Sat Jun 19, 2021 6:55 am When thinking about this kind of issue, I suggest folks read the reasoning of Revenue Ruling 2008-5 and come to their own conclusions. Here is an excerpt:
In Security First National Bank of Los Angeles, 28 BTA 289 (1933), the taxpayer sold bonds (at a market price) to a corporation of which the taxpayer was the sole shareholder. On the same day, in exchange for land, the corporation transferred the same bonds at the same price to a trust over which the taxpayer had absolute dominion and control. In finding that § 214(a)(5), the predecessor to § 1091(a), applied to disallow the loss, the court reasoned as follows:

The [taxpayer] did not personally reacquire substantially identical property and, strictly construed, the language of section 214(a)(5), above referred to, might not apply. However, the rule of strict construction should not be unduly pressed to permit easy evasion of a taxing statute. Carbon Steel Co. v. Lewellyn, 251 U.S. 501. Unless the respondent is right, a trust like this one could be used deliberately to accomplish the very thing which Congress intended to frustrate. ... Although title to the bonds was acquired by the trust, actual command over the property was still in the [taxpayer]. …The difference between acquisition by him personally and acquisition by the trust amounts only to a refinement of title and may be disregarded so far as section 214(a)(5) is concerned.

Security First National Bank, 28 BTA at 314 - 315.
Applying this reasoning to the facts of this ruling, even though an individual retirement account is a tax-exempt trust, A has nevertheless acquired, for purposes of § 1091(a), 100 shares of X Company stock on December 21, 2007, by virtue of the Purchase. See also Shoenberg v. Commissioner, 77 F. 2d 446 (8th Cir. 1935).
This, and not the publication frequently mentioned on here, is the actual guidance with legal effect that the IRS has produced.
In that case the taxpayer was the sole beneficiary of the trust. In this case the custodial account benefits the minor and the taxpayer is the parent. Seems a different set of facts?
livesoft
Posts: 86077
Joined: Thu Mar 01, 2007 7:00 pm

Re: Wash Sale custodial account?

Post by livesoft »

Tanelorn wrote: Sat Jun 19, 2021 6:36 am Yes, 401k are trusts owned by the company and careful views on that suggest there’s not any tax law or IRS ruling that would generate wash sales between one’s personal accounts and ones 401k. Likewise custodial accounts are totally separate ownership with no evidence it would be applied there.
But what about individual 401(k) accounts? :twisted:
IRS Publication 550 wrote:If you sell stock and your spouse or a corporation you control buys substantially identical
stock, you also have a wash sale.
Bolding mine.
Wiki This signature message sponsored by sscritic: Learn to fish.
HootingSloth
Posts: 1050
Joined: Mon Jan 28, 2019 2:38 pm

Re: Wash Sale custodial account?

Post by HootingSloth »

lazynovice wrote: Sat Jun 19, 2021 7:52 am
HootingSloth wrote: Sat Jun 19, 2021 6:55 am When thinking about this kind of issue, I suggest folks read the reasoning of Revenue Ruling 2008-5 and come to their own conclusions. Here is an excerpt:
In Security First National Bank of Los Angeles, 28 BTA 289 (1933), the taxpayer sold bonds (at a market price) to a corporation of which the taxpayer was the sole shareholder. On the same day, in exchange for land, the corporation transferred the same bonds at the same price to a trust over which the taxpayer had absolute dominion and control. In finding that § 214(a)(5), the predecessor to § 1091(a), applied to disallow the loss, the court reasoned as follows:

The [taxpayer] did not personally reacquire substantially identical property and, strictly construed, the language of section 214(a)(5), above referred to, might not apply. However, the rule of strict construction should not be unduly pressed to permit easy evasion of a taxing statute. Carbon Steel Co. v. Lewellyn, 251 U.S. 501. Unless the respondent is right, a trust like this one could be used deliberately to accomplish the very thing which Congress intended to frustrate. ... Although title to the bonds was acquired by the trust, actual command over the property was still in the [taxpayer]. …The difference between acquisition by him personally and acquisition by the trust amounts only to a refinement of title and may be disregarded so far as section 214(a)(5) is concerned.

Security First National Bank, 28 BTA at 314 - 315.
Applying this reasoning to the facts of this ruling, even though an individual retirement account is a tax-exempt trust, A has nevertheless acquired, for purposes of § 1091(a), 100 shares of X Company stock on December 21, 2007, by virtue of the Purchase. See also Shoenberg v. Commissioner, 77 F. 2d 446 (8th Cir. 1935).
This, and not the publication frequently mentioned on here, is the actual guidance with legal effect that the IRS has produced.
In that case the taxpayer was the sole beneficiary of the trust. In this case the custodial account benefits the minor and the taxpayer is the parent. Seems a different set of facts?
Here is what I would say. FWIW, I am a tax lawyer, but I am not any of your tax lawyer.

As an initial matter, I think the Revenue Ruling shows that the arguments people often make about wash sale rules not applying to a 401(k) (not the OP's question) are very weak. The fact that the IRS publication doesn't mention them is a very thin reed, and the reasoning of the revenue ruling, and the cases cited, would seem to carry over to a 401(k) in a fairly straightforward manner.

If a client came to me with the custodial account issue, my advice would probably depend on their specific circumstances. For example, if they had not done anything yet, and if the potential loss was very large, then I would likely tell them that, although there is uncertainty about whether the wash sale rules would apply, the safer course is just to avoid the issue by not engaging in a transaction that might be construed as a wash sale. This avoids a potentially messy dispute with the IRS at a later date, and it is often not hard to avoid the wash sale rules through the methods often discussed on here.

If a client had already done this, I would probably try to informally nudge their return preparer to take a position that this is not a wash sale. I would rely on the fact that the taxpayer is not the beneficial owner of the custodial account to do this.

If push came to shove, and I were asked for a formal legal opinion on this issue, I would need to do more research to provide one. The case and the IRS appear to focus more on "dominion and control" than on beneficial ownership, and that is still present in the case of a custodial account. There is almost surely more legal authority out there that indirectly bears on this question, and I have not exhaustively researched the issue. I suspect that I could get to the point of supporting a return position that the wash sale rules do not apply to a custodial account but would have to actually do the research to get there.

As a practical matter, however, unless the potential loss were a very large one, it is unlikely someone would want to pay for a formal legal opinion on this kind of issue.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
Topic Author
drramey
Posts: 62
Joined: Sun May 16, 2021 12:00 am

Re: Wash Sale custodial account?

Post by drramey »

Thanks for all the replies. This provides some clarity. As long as it isn’t mentioned in the IRS publication then I am comfortable with leaving the dividend reinvestment for her account turned on. The loss wouldn’t be a huge one as of now anyway. Thanks again
placeholder
Posts: 8421
Joined: Tue Aug 06, 2013 12:43 pm

Re: Wash Sale custodial account?

Post by placeholder »

I think it's a very odd practice to try to apply irs rules to other situations when it would be simple for the irs to clarify publications because it's generally the taxpayer's job to do that plus it's not like the irs is unaware of the situation further when new rulings are issued they generally only apply going forward so I think worrying about 401ks or custodial accounts is not warranted.
User avatar
illumination
Posts: 3173
Joined: Tue Apr 02, 2019 6:13 pm

Re: Wash Sale custodial account?

Post by illumination »

FWIW, I asked my tax preparer this same question a while ago, he was said it's separate, so it wouldn't count as a wash sale on my account.

Looked to me like a good loophole, but I don't need it.
123
Posts: 10415
Joined: Fri Oct 12, 2012 3:55 pm

Re: Wash Sale custodial account?

Post by 123 »

Also note that if a child has income from interest and dividends (including capital gains distributions) it can be reported on the parent's return under the Kiddie tax provisions. But if the child has capital gains or losses from trading activity those have to be included on the child's own tax return (and within the child's return the Kiddie tax rates can apply). So it would seem that the consequences of the child's trading activity would not cross over into the parent's trading activity because the transactions "live" in the tax returns of different people who are not spouses.
The closest helping hand is at the end of your own arm.
TropikThunder
Posts: 3918
Joined: Sun Apr 03, 2016 5:41 pm

Re: Wash Sale custodial account?

Post by TropikThunder »

This strikes me as an awful lot of effort and energy to answer a question that will have vanishingly small consequences one way or the other. The purchase of substantially identical securities will only void the portion of the loss that is represented by the replacement shares, not the entire loss automatically. If you sell 1,000 shares of VTI at a loss in your taxable account, and your daughter's account has a reinvestment of say 1 share, only 1 share of your loss is disallowed so really, who cares?

For example, the most recent dividend payment for VTI was $0.67/share on 03-26-2021. The reinvest price for that dividend (depending on your brokerage) was about $206. To have been a big enough dividend for the reinvestment to equal 1 share, the custodial account value would have needed to be at least 307 shares = $63,000 [307 shares x $0.67/share = $205.69). Less than $63,000 and the reinvested dividend would not have been even a full share.

If you're TLH'ing a small enough amount that a reinvested dividend ruins your plans, maybe you're trying too hard.
Tanelorn
Posts: 2370
Joined: Thu May 01, 2014 9:35 pm

Re: Wash Sale custodial account?

Post by Tanelorn »

HootingSloth wrote: Sat Jun 19, 2021 8:10 am Here is what I would say. FWIW, I am a tax lawyer, but I am not any of your tax lawyer.
Thank you for sharing your perspective.
HootingSloth
Posts: 1050
Joined: Mon Jan 28, 2019 2:38 pm

Re: Wash Sale custodial account?

Post by HootingSloth »

TropikThunder wrote: Sat Jun 19, 2021 6:40 pm This strikes me as an awful lot of effort and energy to answer a question that will have vanishingly small consequences one way or the other. The purchase of substantially identical securities will only void the portion of the loss that is represented by the replacement shares, not the entire loss automatically. If you sell 1,000 shares of VTI at a loss in your taxable account, and your daughter's account has a reinvestment of say 1 share, only 1 share of your loss is disallowed so really, who cares?

For example, the most recent dividend payment for VTI was $0.67/share on 03-26-2021. The reinvest price for that dividend (depending on your brokerage) was about $206. To have been a big enough dividend for the reinvestment to equal 1 share, the custodial account value would have needed to be at least 307 shares = $63,000 [307 shares x $0.67/share = $205.69). Less than $63,000 and the reinvested dividend would not have been even a full share.

If you're TLH'ing a small enough amount that a reinvested dividend ruins your plans, maybe you're trying too hard.
I think everything you're saying here is correct, and that as a practical matter the OP's decision to ignore this as a potential issue makes perfect sense. Hopefully my post above did not suggest otherwise.

On a different set of facts, however, this could be a real question, so it's worth it to me to know that there is some uncertainty here. I come across a lot of "small" and technical questions in my work. If you add enough zeroes onto the numbers, then people start to care about the nuances to almost every tax question you can imagine. For example, if someone is tax loss harvesting an eight figure loss, they don't seem to mind if you dig into things a bit or recommend a conservative course of action, and the IRS won't just go away because you tell them a publication, which has no legal effect in the first place, doesn't mention the issue.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
TropikThunder
Posts: 3918
Joined: Sun Apr 03, 2016 5:41 pm

Re: Wash Sale custodial account?

Post by TropikThunder »

HootingSloth wrote: Sat Jun 19, 2021 9:07 pm
TropikThunder wrote: Sat Jun 19, 2021 6:40 pm This strikes me as an awful lot of effort and energy to answer a question that will have vanishingly small consequences one way or the other. The purchase of substantially identical securities will only void the portion of the loss that is represented by the replacement shares, not the entire loss automatically. If you sell 1,000 shares of VTI at a loss in your taxable account, and your daughter's account has a reinvestment of say 1 share, only 1 share of your loss is disallowed so really, who cares?

For example, the most recent dividend payment for VTI was $0.67/share on 03-26-2021. The reinvest price for that dividend (depending on your brokerage) was about $206. To have been a big enough dividend for the reinvestment to equal 1 share, the custodial account value would have needed to be at least 307 shares = $63,000 [307 shares x $0.67/share = $205.69). Less than $63,000 and the reinvested dividend would not have been even a full share.

If you're TLH'ing a small enough amount that a reinvested dividend ruins your plans, maybe you're trying too hard.
I think everything you're saying here is correct, and that as a practical matter the OP's decision to ignore this as a potential issue makes perfect sense. Hopefully my post above did not suggest otherwise.
I was unclear, but I was more addressing the concern over a reinvested dividend interfering with TLH plans. But I agree the lack of clarity about other types of accounts isn't helpful.
Topic Author
drramey
Posts: 62
Joined: Sun May 16, 2021 12:00 am

Re: Wash Sale custodial account?

Post by drramey »

If you're TLH'ing a small enough amount that a reinvested dividend ruins your plans, maybe you're trying too hard.
I have realized gains of around 40k for the year. I was going to capture a 3,000 loss on VTI via TLH. Perhaps it’s not even worth the trouble. Maybe I am trying too hard. I could the DRIP back on for all accounts and forget it I suppose.
placeholder
Posts: 8421
Joined: Tue Aug 06, 2013 12:43 pm

Re: Wash Sale custodial account?

Post by placeholder »

I guarantee that if someone wanted to take a tax rule that was beneficial to the taxpayer and apply it somewhere that the pubs don't specify then the answers would be generally negative on that.
lazynovice
Posts: 3369
Joined: Mon Apr 16, 2012 10:48 pm
Location: Denver area. Former Texan.

Re: Wash Sale custodial account?

Post by lazynovice »

drramey wrote: Sun Jun 20, 2021 5:17 pm
If you're TLH'ing a small enough amount that a reinvested dividend ruins your plans, maybe you're trying too hard.
I have realized gains of around 40k for the year. I was going to capture a 3,000 loss on VTI via TLH. Perhaps it’s not even worth the trouble. Maybe I am trying too hard. I could the DRIP back on for all accounts and forget it I suppose.
I would do it. But if you are concerned, why not turn the DRIP off this month only, harvest the loss and the invest her dividends in something else for a month?
Topic Author
drramey
Posts: 62
Joined: Sun May 16, 2021 12:00 am

Re: Wash Sale custodial account?

Post by drramey »

I would do it. But if you are concerned, why not turn the DRIP off this month only, harvest the loss and the invest her dividends in something else for a month?

Good advice. Thanks for the post. I don’t think I have any concerns after reading all the replies. I will take the loss and lave her dividend reinvestment on.
Post Reply