Sell all shares in Roth IRA to avoid a wash sale?

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lakpr
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by lakpr » Wed Mar 25, 2020 2:25 pm

elgob wrote:
Wed Mar 25, 2020 2:16 pm
It's unclear, it seems to me, that the highlighted point is relevant under the language of the statute, regs, or IRS Pub 550 (none of which, for example, refers to "replacement shares", or deals with a disposition of those previously purchased shares). Under the statutory language, it seems that you would have a wash sale on the number of VTSAX shares sold equal to the number of VTSAX shares bought in the preceding 30 days. I realize that most others in this thread take a different view, and they might well be right. I just haven't seen the authority to support it.
IRS Pub 550, page 56 said this:
If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold.
So even if there is a wash sale, the disallowed loss can be added to the shares bought within the past 30 days as additional basis. If the only remaining shares are in the IRA or Roth-IRA, well, since there is no concept of "basis" for IRA accounts, the loss is permanently disallowed. The "replacement shares" term is not used in any IRS publication of course, but thinking in those terms would clarify the application of wash-sale rules.

Edit: well, iceport got to it first :)

saintsfan342000
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by saintsfan342000 » Wed Mar 25, 2020 2:32 pm

yosemite_mountain wrote:
Sun Mar 22, 2020 6:25 pm
I would like to sell 180k worth of Vanguard Total Stock (VTSAX) in my taxable account and exchange the shares for Vanguard 500 Index in my taxable account. This would result in a 50k loss that I would tax loss harvest
Worst case don’t you just wash out the number of shares you had bought on 2/25, which is far fewer than the number of shares you sold in taxable, I.e. only a small portion of the loss is disallowed.

retiredjg
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by retiredjg » Wed Mar 25, 2020 2:55 pm

elgob wrote:
Wed Mar 25, 2020 11:38 am
Trying to figure out what authority supports the highlighted point. I don't really see support for it in the language of the Internal Revenue Code (26 U.S. Code § 1091), in the Regs (26 CFR § 1.1091-1 and the following sections), in the Revenue Ruling dealing with IRAs (2008-5), or in IRS Publication 550. Any help?
Sorry, I didn't get notification of your post.

This has been accepted around these parts for many years (which does not make it right). The source I recall personally is also Fairmark.

elgob
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by elgob » Wed Mar 25, 2020 3:15 pm

iceport wrote:
Wed Mar 25, 2020 2:24 pm
Think of it this way: By disposing of any replacement shares — defined as being purchased within the 61-day wash sale period — your "economic position" reverts to what it was prior to the wash sale period. Then, by selling at a loss in taxable, your economic position with respect to that fund does indeed change. That is the test of whether or not the loss washes with other purchases. It only becomes a wash if you find a way to book the loss without changing your economic position. Without replacement shares, the loss is not fictional, it's real. The law does not prevent one from claiming a real loss.
That's very well said, and the logic of it makes perfect sense. But where is that test found in the law itself? I'm not seeing it. And I don't see it in Publication 550's description of the law, which states the test as merely whether, within the 30 days before or after the sale, you "4. Acquire[d] substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA." It doesn't ask, in addition, whether you did or did not dispose of this newly acquired stock prior to the loss sale.

There is a separate paragraph in this part of Publication 550 dealing with the disallowed loss:
If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold.
But this paragraph starts off with the assumption that "your loss was disallowed because of the wash sale rules." In other words, this paragraph is not part of the test of whether your loss is disallowed. You have to answer that question before you get to this paragraph. And, in any event, the first sentence makes clear that the subject of this paragraph, i.e., adding the disallowed loss to the new stock, has no application in the IRA situation (#4). So, this paragraph doesn't really assist you in determining, in the first place, whether you have a wash sale; it merely describes the consequences, in non-IRA situations.

Anyway, sorry, don't mean to beat a dead horse here. It just seems to me that there are statements about the wash sale rule being made in this thread and others that aren't based on the governing text of the rule itself.

elgob
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by elgob » Wed Mar 25, 2020 3:19 pm

saintsfan342000 wrote:
Wed Mar 25, 2020 2:32 pm
yosemite_mountain wrote:
Sun Mar 22, 2020 6:25 pm
I would like to sell 180k worth of Vanguard Total Stock (VTSAX) in my taxable account and exchange the shares for Vanguard 500 Index in my taxable account. This would result in a 50k loss that I would tax loss harvest
Worst case don’t you just wash out the number of shares you had bought on 2/25, which is far fewer than the number of shares you sold in taxable, I.e. only a small portion of the loss is disallowed.
+1

Walkure
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by Walkure » Wed Mar 25, 2020 3:57 pm

Duckie wrote:
Tue Mar 24, 2020 9:27 pm
Karl A wrote:In the above scenario, if the OP also held total stock in another separate IRA that was not touched at all, would it then be a wash sale?
Yes, if the OP still held VTSAX in "any" IRA it would be a wash sale.
This got a bit lost upthread but I think it’s a good question and I disagree with Duckie.
I’ll restate the scenario so it is clearer:
Investor Bob has 3 accounts - one trad IRA, one Roth IRA, and one taxable. All three contain shares of VTSAX. The trad was bought 10 years ago and has dividends set to exchange into another fund so there have been no other purchases. The Roth is set to reinvest and so has potential replacement shares purchased in the last month. Bob sells all the VTSAX in his taxable for a loss. To avoid a wash he must also sell the newest shares in the Roth but since he can’t sell by spec id he has to dump everything in the Roth. However, I would contend that he does not also have to sell any of the shares in the trad since none of them are potential replacement shares.

dropdx
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by dropdx » Wed Mar 25, 2020 4:11 pm

My question is - why is this so unclear? Why does NO ONE seem to really know?

retiredjg
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by retiredjg » Wed Mar 25, 2020 4:22 pm

dropdx wrote:
Wed Mar 25, 2020 4:11 pm
My question is - why is this so unclear? Why does NO ONE seem to really know?
I think it has to do with how tax law is created.

A law is voted on by Congress and signed by the Pres and then "promulgated" by the agency (the IRS in this case) which means writing rules and regulations about how to enforce it. Occasionally there is a disconnect between what the statute says and what the agency says the statute means or how they are able to enforce it.

Any time a law is created, there is an unforeseen consequence (usually many) and these are worked out by individual cases by things like rulings and court cases. Occasionally, there is a disconnect there. And sometimes directly conflicting decisions.

Then things that did not exist when the law was created come into being (like maybe 401k accounts in this situation - that's a guess on my part) and nobody knows how that fits in until there is a definitive court case or some ruling from the IRS to define how it fits in. And sometimes the cases and rulings are applied broadly and sometimes narrowly.

And then other things come into existence - maybe ETFs in this case - and people what to know how they fit it.... for example, are they substantially identical or not?

And so it goes on and on. This topic (wash sales) is a particularly thorny one and the IRS has so little interest in it that nothing gets clarified so nobody knows.

That's my version of the answer to your question. :twisted:

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iceport
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by iceport » Wed Mar 25, 2020 4:38 pm

^^^^ I think you're onto something with that analysis, retiredjg! :thumbsup

What I'm most curious about is whether the powers that be are allowing the wash sale rule decay into obsolescence intentionally, or out of simple neglect. No way of knowing, I suppose, without being a fly on the wall somewhere, but I do suspect the former...
"Discipline matters more than allocation.” ─William Bernstein

elgob
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by elgob » Wed Mar 25, 2020 4:53 pm

Walkure wrote:
Wed Mar 25, 2020 3:57 pm
Duckie wrote:
Tue Mar 24, 2020 9:27 pm
Karl A wrote:In the above scenario, if the OP also held total stock in another separate IRA that was not touched at all, would it then be a wash sale?
Yes, if the OP still held VTSAX in "any" IRA it would be a wash sale.
This got a bit lost upthread but I think it’s a good question and I disagree with Duckie.
I’ll restate the scenario so it is clearer:
Investor Bob has 3 accounts - one trad IRA, one Roth IRA, and one taxable. All three contain shares of VTSAX. The trad was bought 10 years ago and has dividends set to exchange into another fund so there have been no other purchases. The Roth is set to reinvest and so has potential replacement shares purchased in the last month. Bob sells all the VTSAX in his taxable for a loss. To avoid a wash he must also sell the newest shares in the Roth but since he can’t sell by spec id he has to dump everything in the Roth. However, I would contend that he does not also have to sell any of the shares in the trad since none of them are potential replacement shares.
However, the sale in taxable is only a wash sale as to the same number of shares that were newly acquired in the Roth by reinvestment of a dividend. That may well be a trivial number of shares compared to the number of shares being sold in taxable. So dumping all the shares in the IRAs, one or both, even if that would in fact eliminate the wash sale (not clear, as I've said above), might be overkill to avoid what may just be a tiny wash sale loss disallowance, depending on the numbers.

retiredjg
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by retiredjg » Wed Mar 25, 2020 5:27 pm

iceport wrote:
Wed Mar 25, 2020 4:38 pm
^^^^ I think you're onto something with that analysis, retiredjg! :thumbsup

What I'm most curious about is whether the powers that be are allowing the wash sale rule decay into obsolescence intentionally, or out of simple neglect. No way of knowing, I suppose, without being a fly on the wall somewhere, but I do suspect the former...
My opinion only....the wash sale statute was written when investing was much different from now - mostly in individual stocks and maybe some mutual funds, but probably few to no index funds and certainly before ETFs. And I suspect that trading was mostly through brokers at that time. Online didn't exist.

At that point, the wash sale regulatioins might have been logical and even enforceable and tax loss harvesting probably did not exist (or exist much). That is no longer true.

In the meantime, their workforce has dwindled and they can hardly keep up with important stuff. This is a mess that the lawmakers have gotten them into that is not enforceable. So they put their resources to what they can actually do.

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iceport
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by iceport » Wed Mar 25, 2020 6:41 pm

retiredjg wrote:
Wed Mar 25, 2020 5:27 pm
iceport wrote:
Wed Mar 25, 2020 4:38 pm
^^^^ I think you're onto something with that analysis, retiredjg! :thumbsup

What I'm most curious about is whether the powers that be are allowing the wash sale rule decay into obsolescence intentionally, or out of simple neglect. No way of knowing, I suppose, without being a fly on the wall somewhere, but I do suspect the former...
My opinion only....the wash sale statute was written when investing was much different from now - mostly in individual stocks and maybe some mutual funds, but probably few to no index funds and certainly before ETFs. And I suspect that trading was mostly through brokers at that time. Online didn't exist.

At that point, the wash sale regulatioins might have been logical and even enforceable and tax loss harvesting probably did not exist (or exist much). That is no longer true.

In the meantime, their workforce has dwindled and they can hardly keep up with important stuff. This is a mess that the lawmakers have gotten them into that is not enforceable. So they put their resources to what they can actually do.
We're on exactly the same page on this! 8-) :beer

In saying "powers that be," I wasn't referring to the IRS. I meant congress. :wink:
"Discipline matters more than allocation.” ─William Bernstein

rkhusky
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by rkhusky » Wed Mar 25, 2020 7:03 pm

The IRS has not forgotten the wash sale rule. They issued a revenue ruling in 2008 clarifying that the wash sale rule applies to IRA's.

rkhusky
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by rkhusky » Wed Mar 25, 2020 7:16 pm

The wash sale rules for ordinary investments seem pretty clear to me. On the other hand, things like options and straddles and constructive sales are beyond me. Substantially identical is used for the latter too.

But check out http://g2ft.com/resources/washsales.html, http://g2ft.com/resources/straddles.html, and http://g2ft.com/resources/constructivesales.html for all the gory details (including videos!).

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iceport
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by iceport » Wed Mar 25, 2020 8:55 pm

rkhusky wrote:
Wed Mar 25, 2020 7:03 pm
The IRS has not forgotten the wash sale rule. They issued a revenue ruling in 2008 clarifying that the wash sale rule applies to IRA's.
True, but they don't seem to care much whether folks are hiding wash sales in their 401ks, and there might as well not even be a wash sale rule for folks who use total market index funds for their TLH pairs. Seriously, the rule is practically meaningless for savvy index fund investors. If they really want to prevent a taxpayer from claiming a loss while staying invested, they're doing a pretty pathetic job of it...

I've seen jaws literally drop when I explain to novice investors without taxable accounts how trivial it is to sidestep the wash sale rule. Heck, we've got folks right here on this forum just itching for a fight with the IRS to defend their divine right to swap one S&P 500 index fund for another without reporting a wash sale. If that's legal, then I have no idea why they bother keeping the law on the books. (Yeah, I know, it does catch some stuff...)
"Discipline matters more than allocation.” ─William Bernstein

rkhusky
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Re: Sell all shares in Roth IRA to avoid a wash sale?

Post by rkhusky » Thu Mar 26, 2020 7:01 am

iceport wrote:
Wed Mar 25, 2020 8:55 pm
If they really want to prevent a taxpayer from claiming a loss while staying invested, they're doing a pretty pathetic job of it...
Until they want to make an example of someone.

Anyway, we are not supposed to be advising people to break the law, just because the chance of getting caught is very small. (An analogy might be driving 2 mph over the limit).

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