?wash sale to extract capital losses from IRA's?

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privateer79
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?wash sale to extract capital losses from IRA's?

Post by privateer79 » Sun Nov 17, 2019 12:15 pm

I'm 90% sure the answer is "no" but thought I should ask anyway since I have some rebalancing to do:

Given that you can potentially cause a wash-sale between taxable and retirement accounts, transferring the cost basis into the retirement account (where it is useless for TLH purposes)... I was wondering if anyone had investigated if it was possible to do the reverse. that is, to revive "zombie" losses that occurred within retirement accounts by washsaleing them to a traditional account where the loss could be harvested?

This is probably one of those places where the regulations are unfavorably one-sided, but it would put my (relentlessly optimization seeking) mind at ease to understand how its prevented.

thanks!!! :beer

MotoTrojan
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Re: ?wash sale to extract capital losses from IRA's?

Post by MotoTrojan » Sun Nov 17, 2019 12:42 pm

Not quite following but I don’t think so. I do like to TLH into my retirement accounts when possible though (sell in taxable and buy in IRA/401K). In the IRA case I have to watch out for washes but I don’t bother in 401K.

Topic Author
privateer79
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Re: ?wash sale to extract capital losses from IRA's?

Post by privateer79 » Sun Nov 17, 2019 1:38 pm

MotoTrojan wrote:
Sun Nov 17, 2019 12:42 pm
Not quite following but I don’t think so. I do like to TLH into my retirement accounts when possible though (sell in taxable and buy in IRA/401K). In the IRA case I have to watch out for washes but I don’t bother in 401K.
my understanding is that when you do this (specifically into an IRA) it would cause a wash sale, and the basis that previously existed in the taxable account moves to the IRA.... and the TLH is disallowed (or deferred... i.e. the basis of the taxable account is moved into the basis of the IRA)

I'm wondering if anyone has tried using this in the opposite direction... I.e. sell a security at a loss inside an IRA, and purchase an identical security in a taxable account. (and if you do that, would the wash sale rule move the original higher basis out of the IRA and into the Taxable account... essentially starting you off with a harvestable loss in the taxable account)...

i.e.
its true that if you:

originally bought 100 Z for 300$/share in taxable
Sell 100 Z in taxable for 150$ /share
immediately buy 100 Z in IRA for 150$ /Share
the capital loss in the taxable is disallowed due to wash sale and the IRA shares have a basis of 300$/Share (but kinda useless)

I'm skeptical but wondering if the opposite is possible:

originally bought 100 Z for 300$/share in IRA
Sell 100 Z in IRA for 150$ /share
immediately buy 100 Z in taxable for 150$ /Share (you'r Z now wash-sale inherited the basis of 300$/share)
wait 60 days
Sell 100 Z at 160$/share in taxable and claim a capital loss of 140$/share using the old basis

Alan S.
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Re: ?wash sale to extract capital losses from IRA's?

Post by Alan S. » Sun Nov 17, 2019 2:26 pm

Won't work. Your basis in taxable is what you paid for the shares in taxable.

An in kind transfer out of an IRA to taxable also changes the basis to what the shares were worth when distributed (as reflected on the 1099R). For example, if you are taking RMDs you can distribute the RMD in cash or in kind. So you transfer shares that you paid 300 for in the IRA (now worth 150) to taxable as part of your RMD. No new sale or purchase has occurred. However, your cost basis for these shares in taxable is what they were worth when distributed (150) out of the IRA, and your holding period starts over in taxable. So even though you transferred the shares in kind without sale or re purchase, your cost basis in taxable is the same as if you had repurchased in taxable on the date of the transfer.

RubyTuesday
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Re: ?wash sale to extract capital losses from IRA's?

Post by RubyTuesday » Sun Nov 17, 2019 6:31 pm

MotoTrojan wrote:
Sun Nov 17, 2019 12:42 pm
Not quite following but I don’t think so. I do like to TLH into my retirement accounts when possible though (sell in taxable and buy in IRA/401K). In the IRA case I have to watch out for washes but I don’t bother in 401K.
What do you mean you don’t bother in 401(k)? If you’re saying, for instance, that you sell VTI for loss in taxable and immediately re-buy VTI in 401(k), claim the loss and don’t worry about the wash sale, I believe that is not allowed. I believe this would be a wash sale, even if it wasn’t easily detected.

ETA: on further research I don’t believe the IRS has given specific guidance on this w.r.t. 401(k), but it certainly seems that the line of reasoning about disallowing the loss for an IRA would hold for 401(k) or other erisa plans.

rkhusky
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Re: ?wash sale to extract capital losses from IRA's?

Post by rkhusky » Sun Nov 17, 2019 8:33 pm

RubyTuesday wrote:
Sun Nov 17, 2019 6:31 pm
MotoTrojan wrote:
Sun Nov 17, 2019 12:42 pm
Not quite following but I don’t think so. I do like to TLH into my retirement accounts when possible though (sell in taxable and buy in IRA/401K). In the IRA case I have to watch out for washes but I don’t bother in 401K.
What do you mean you don’t bother in 401(k)? If you’re saying, for instance, that you sell VTI for loss in taxable and immediately re-buy VTI in 401(k), claim the loss and don’t worry about the wash sale, I believe that is not allowed. I believe this would be a wash sale, even if it wasn’t easily detected.

ETA: on further research I don’t believe the IRS has given specific guidance on this w.r.t. 401(k), but it certainly seems that the line of reasoning about disallowing the loss for an IRA would hold for 401(k) or other erisa plans.
Some people require that the IRS specifically mention 401k's in a ruling, even though the statute is a blanket prohibition that doesn't mention any type of account. The IRS doesn't seem care much about enforcing the wash sale rule, especially in these cases, so people will continue to disregard the wash sale rule.

MotoTrojan
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Re: ?wash sale to extract capital losses from IRA's?

Post by MotoTrojan » Sun Nov 17, 2019 9:31 pm

RubyTuesday wrote:
Sun Nov 17, 2019 6:31 pm
MotoTrojan wrote:
Sun Nov 17, 2019 12:42 pm
Not quite following but I don’t think so. I do like to TLH into my retirement accounts when possible though (sell in taxable and buy in IRA/401K). In the IRA case I have to watch out for washes but I don’t bother in 401K.
What do you mean you don’t bother in 401(k)? If you’re saying, for instance, that you sell VTI for loss in taxable and immediately re-buy VTI in 401(k), claim the loss and don’t worry about the wash sale, I believe that is not allowed. I believe this would be a wash sale, even if it wasn’t easily detected.

ETA: on further research I don’t believe the IRS has given specific guidance on this w.r.t. 401(k), but it certainly seems that the line of reasoning about disallowing the loss for an IRA would hold for 401(k) or other erisa plans.
Yup, bit of a gray area but I figure the tax-pain would be worth being known as THE guy on Bogleheads that got hit for this :).

In my IRA I am careful to buy non-identical, or an entirely different asset class and then rebalance in 401k.

Alan S.
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Re: ?wash sale to extract capital losses from IRA's?

Post by Alan S. » Sun Nov 17, 2019 10:05 pm

Note that RR 2008-5 refers solely to IRA accounts. https://www.irs.gov/pub/irs-drop/rr-08-05.pdf

A taxpayer does not always have full control over their 401k plans as offerings are limited to those selected by the employer, and purchases are made throughout the year as elective deferrals are allocated. Matching contributions are made by the employer at times outside the control of the participant. The plan is managed by the employer, not the participant, who is limited to the investment choices provided under the employer's control.

There has been no reported cases of the IRS enforcing a wash sale on a 401k purchase, nor has the IRS asked the employer to notify employees of such a risk. I figure if this ever happens, it will be big news in financial circles, and employers would have to provide a warning bulletin to participants.

The IRS revenue ruling is allowed to broaden the scope of the issue, unlike private letter rulings that apply only to the specific situation applied to address. The RR attached above says nothing to suggest that non IRA plans are subject to this ruling, and the IRS has also not added such a suggestion in the 11 years since the ruling was released.

I would not worry about this applying to qualified plans until the IRS indicates such.

rkhusky
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Re: ?wash sale to extract capital losses from IRA's?

Post by rkhusky » Sun Nov 17, 2019 10:21 pm

The wash sale statute has no exemptions for types of accounts. And the IRS has provided no conditions on accounts whereby an exemption might be provided. Many have more control over their 401k’s than over their spouse’s accounts, which are specifically mentioned as being applicable to wash sales.

I would wait until the IRS specifically exempts 401k’s before ignoring wash sales there.
Last edited by rkhusky on Mon Nov 18, 2019 8:12 am, edited 2 times in total.

Lee_WSP
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Re: ?wash sale to extract capital losses from IRA's?

Post by Lee_WSP » Sun Nov 17, 2019 10:25 pm

There's no basis in tax deferred holdings. You pay tax on the whole amount when you withdraw it.

TropikThunder
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Re: ?wash sale to extract capital losses from IRA's?

Post by TropikThunder » Mon Nov 18, 2019 1:47 am

Lee_WSP wrote:
Sun Nov 17, 2019 10:25 pm
There's no basis in tax deferred holdings. You pay tax on the whole amount when you withdraw it.
+1. Stated differently, cost basis in an IRA is zero regardless of what price the fund was purchased at. The entire withdrawal is either taxed as regular income (traditional IRA) or not taxed at all (Roth IRA). So you can’t really sell at a loss in an IRA.

rkhusky
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Re: ?wash sale to extract capital losses from IRA's?

Post by rkhusky » Mon Nov 18, 2019 8:10 am

Lee_WSP wrote:
Sun Nov 17, 2019 10:25 pm
There's no basis in tax deferred holdings. You pay tax on the whole amount when you withdraw it.
Apart from the non-deducted portion, if any.

Tanelorn
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Re: ?wash sale to extract capital losses from IRA's?

Post by Tanelorn » Mon Nov 18, 2019 8:19 am

Alan S. wrote:
Sun Nov 17, 2019 10:05 pm
Note that RR 2008-5 refers solely to IRA accounts. https://www.irs.gov/pub/irs-drop/rr-08-05.pdf

The RR attached above says nothing to suggest that non IRA plans are subject to this ruling, and the IRS has also not added such a suggestion in the 11 years since the ruling was released.
I think OP's question is whether the logic employed by the IRS in that ruling allows a reasonable interpretation that wash sales should apply generally between trades made between IRAs and taxable accounts, even though the IRS only ruled (perhaps as expected in such situations?) on a case that goes in their favor.

I agree about the rules are clear about distributions of securities in kind and their basis being set as FMV at distribution, but this is for the case of trades in the same securities each made within both types of accounts.

Lee_WSP
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Re: ?wash sale to extract capital losses from IRA's?

Post by Lee_WSP » Mon Nov 18, 2019 9:01 am

rkhusky wrote:
Mon Nov 18, 2019 8:10 am
Lee_WSP wrote:
Sun Nov 17, 2019 10:25 pm
There's no basis in tax deferred holdings. You pay tax on the whole amount when you withdraw it.
Apart from the non-deducted portion, if any.
Yes, but I'm unaware how you would go about changing that other thank through Roth conversions. Ie, what the op is trying to do.

rkhusky
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Re: ?wash sale to extract capital losses from IRA's?

Post by rkhusky » Mon Nov 18, 2019 10:06 am

Lee_WSP wrote:
Mon Nov 18, 2019 9:01 am
rkhusky wrote:
Mon Nov 18, 2019 8:10 am
Lee_WSP wrote:
Sun Nov 17, 2019 10:25 pm
There's no basis in tax deferred holdings. You pay tax on the whole amount when you withdraw it.
Apart from the non-deducted portion, if any.
Yes, but I'm unaware how you would go about changing that other thank through Roth conversions. Ie, what the op is trying to do.
Right. OP's method won't work.

Topic Author
privateer79
Posts: 120
Joined: Fri Apr 04, 2008 12:21 am

Re: ?wash sale to extract capital losses from IRA's?

Post by privateer79 » Tue Nov 19, 2019 1:13 am

Tanelorn wrote:
Mon Nov 18, 2019 8:19 am
Alan S. wrote:
Sun Nov 17, 2019 10:05 pm
Note that RR 2008-5 refers solely to IRA accounts. https://www.irs.gov/pub/irs-drop/rr-08-05.pdf

The RR attached above says nothing to suggest that non IRA plans are subject to this ruling, and the IRS has also not added such a suggestion in the 11 years since the ruling was released.
I think OP's question is whether the logic employed by the IRS in that ruling allows a reasonable interpretation that wash sales should apply generally between trades made between IRAs and taxable accounts, even though the IRS only ruled (perhaps as expected in such situations?) on a case that goes in their favor.

I agree about the rules are clear about distributions of securities in kind and their basis being set as FMV at distribution, but this is for the case of trades in the same securities each made within both types of accounts.
yes... this is the question of interest to me... (i.e. by ruling that taxable and IRA accounts were substantially similar, was the door opened to transferring basis in the opposite direction)

reading through 1091(d) seems to echo some of the other comments in this thread that generally IRA accounts don't have basis (unless there was a non-deductible contribution) ... and that's the basis used in computing the post wash sale basis of the purchased security. I think practically that makes this mostly a dead end.... (of course feel free to keep chatting :) )

thanks all :sharebeer

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