Am I allowed to sell stock at a lower price than the market value?

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Caduceus
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Am I allowed to sell stock at a lower price than the market value?

Post by Caduceus »

I own a stock that trades both on a foreign exchange and OTC (Over the counter). The over-the-counter version of the stock goes for ages without a single trade. Like, maybe, two weeks can go buy without a single buy or sell. The exact same security that is listed on the foreign exchange has lots of liquidity.

Which brings up an interesting thought experiment for me. Let's say I currently own the OTC version of the stock in a taxable account, and I'd like to transfer the asset into my IRA. Let's further say that the current market value of the stock (based on what it trades on the foreign market) is $100 per share in US dollars. They are the exact same security, so they should be trading almost exactly at the same price despite their different ticker symbols, otherwise arbitrage could occur.

Can I place a limit order to buy the OTC stock at $10 in my IRA, and then simultaneously enter a limit order to sell my OTC stock from my taxable account at $10?

I'm curious what will happen. If there's no one who's willing to buy the stock at more than $10, I'll end up transferring my interest at a very low cost basis, effectively avoiding paying any tax on capital gains in my taxable account. Of course, all it will take is one person to offer to buy the stock at $11 in the 1 second between my buy limit order and sell limit order, and I'm screwed because I'll end up selling the stock for 10% of what it's worth.

The OTC markets seem totally slow and illiquid to me for this security most of the time, so I'm wondering if there really will be someone to snap up my shares. Also, is what I'm proposing even allowed? I can't think of a legal reason why this would be disallowed, but maybe I'm missing something.
livesoft
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by livesoft »

Caduceus wrote: Thu Jun 10, 2021 11:01 am Can I place a limit order to buy the OTC stock at $10 in my IRA, and then simultaneously enter a limit order to sell my OTC stock from my taxable account at $10?
Yes, you can do that. Someone else may grab the shares at $10 before you do though including the market maker.

I have used 2 limit orders to move shares quickly between accounts in the past. viewtopic.php?p=1488386#p1488386
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riverguy
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by riverguy »

Just because there’s no trading doesn’t mean there aren’t any orders sitting out there. Not to mention computers and algorithms watching everything these days. I think you will be likely to sell your shares to someone else if you try this.
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leeks
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by leeks »

You could try selling just one share to see what happens. Just for fun. Report back.
Oregano
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by Oregano »

Caduceus wrote: Thu Jun 10, 2021 11:01 am Can I place a limit order to buy the OTC stock at $10 in my IRA, and then simultaneously enter a limit order to sell my OTC stock from my taxable account at $10?
First off, this will almost certainly not work as someone will buy the stock between $10 and $100. Second, it would be an illegal cross trade to be on both sides of a trade between two accounts of the same owner.

For both reasons, you shouldn't do this.
HootingSloth
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by HootingSloth »

Oregano wrote: Fri Jun 11, 2021 1:35 pm
Caduceus wrote: Thu Jun 10, 2021 11:01 am Can I place a limit order to buy the OTC stock at $10 in my IRA, and then simultaneously enter a limit order to sell my OTC stock from my taxable account at $10?
First off, this will almost certainly not work as someone will buy the stock between $10 and $100. Second, it would be an illegal cross trade to be on both sides of a trade between two accounts of the same owner.

For both reasons, you shouldn't do this.
In addition to any other problems this may have, you also would not realize a tax loss by standing on both sides of a trade as you are not entering into a taxable exchange. Reporting a loss, while knowing that the trade executed in this manner and not at fair market value, is wandering into the territory of criminal tax evasion. The fact that your brokerage sends you a 1099-B showing a loss would not change this. Although it is a highly unusual situation, if you were able to accomplish this without violating any non-tax laws, it would probably be correct to: (a) report gain equal to the difference between actual fair market value and your basis in the stock; and (b) report an IRA contribution equal to the difference between the actual fair market value of the stock and the price the trade executed at. You also would likely need to attach a schedule to your tax return explaining exactly what was done and perhaps file a Form 8275 disclosure statement. The audit could be interesting though.
Last edited by HootingSloth on Fri Jun 11, 2021 3:35 pm, edited 1 time in total.
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finite_difference
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by finite_difference »

Can’t you transfer from the OTC version to the foreign exchange version, and then transfer that to your IRA?

Or just sell it and transfer the money to your IRA, and then buy the stock in your IRA?
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HootingSloth
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by HootingSloth »

finite_difference wrote: Fri Jun 11, 2021 2:19 pm Can’t you transfer from the OTC version to the foreign exchange version, and then transfer that to your IRA?

Or just sell it and transfer the money to your IRA, and then buy the stock in your IRA?
In-kind transfers from a taxable account to an IRA are not permitted. Selling the stock for cash, contributing that cash to the IRA, and buying the stock in the IRA seems fine, but I don't think that is what the OP was getting at.
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Oregano
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by Oregano »

HootingSloth wrote: Fri Jun 11, 2021 2:13 pm
Oregano wrote: Fri Jun 11, 2021 1:35 pm
Caduceus wrote: Thu Jun 10, 2021 11:01 am Can I place a limit order to buy the OTC stock at $10 in my IRA, and then simultaneously enter a limit order to sell my OTC stock from my taxable account at $10?
First off, this will almost certainly not work as someone will buy the stock between $10 and $100. Second, it would be an illegal cross trade to be on both sides of a trade between two accounts of the same owner.

For both reasons, you shouldn't do this.
In addition to any other problems this may have, you also would not realize a tax loss by standing on both sides of a trade as you are not entering into a taxable exchange. Reporting a loss, while knowing that the trade executed in this manner and not at fair market value, is wandering into the territory of criminal tax evasion. The fact that your brokerage sends you a 1099-B showing a loss would not change this. Although it is a highly unusual situation, if you were able to accomplish this without violating any non-tax laws, it would probably be correct to: (a) report gain equal to the difference between actual fair market value and your basis in the stock; and (b) report an IRA contribution equal to this difference. You also would likely need to attach a schedule to your tax return explaining exactly what was done and perhaps file a Form 8275 disclosure statement. The audit could be interesting though.
Wash sale rule would apply here.
psteinx
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by psteinx »

I would think there is some sort of arbitrage method to convert from the OTC exchange to the native foreign exchange, and back.

If so, that would bound the OTC price to the foreign price, plus or minus costs of the transfer and maybe a small risk/effort/liquidity premium.

If you're ambitious, you could enquire about transferring from the OTC exchange to the foreign exchange yourself. If you're less ambitious, try selling on the OTC exchange and accept the hit. But I don't think it would be anywhere near 90%. Maybe 1-3% would be a very rough guess. Try to do the sale when the both the OTC exchange and the foreign exchange are open. i.e. If it's a London traded stock, and you're selling on an American OTC exchange, sell very early in the morning, near the US exchange's open.
mmcmonster
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by mmcmonster »

HootingSloth wrote: Fri Jun 11, 2021 2:22 pm[...]Selling the stock for cash, contributing that cash to the IRA, and buying the stock in the IRA seems fine, but I don't think that is what the OP was getting at.
If I was the IRS, I would think the point of this exercise is to bypass limits set on IRA contributions.

Tread carefully. Preferably in a different direction.
HootingSloth
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by HootingSloth »

Oregano wrote: Fri Jun 11, 2021 2:31 pm
HootingSloth wrote: Fri Jun 11, 2021 2:13 pm
Oregano wrote: Fri Jun 11, 2021 1:35 pm
Caduceus wrote: Thu Jun 10, 2021 11:01 am Can I place a limit order to buy the OTC stock at $10 in my IRA, and then simultaneously enter a limit order to sell my OTC stock from my taxable account at $10?
First off, this will almost certainly not work as someone will buy the stock between $10 and $100. Second, it would be an illegal cross trade to be on both sides of a trade between two accounts of the same owner.

For both reasons, you shouldn't do this.
In addition to any other problems this may have, you also would not realize a tax loss by standing on both sides of a trade as you are not entering into a taxable exchange. Reporting a loss, while knowing that the trade executed in this manner and not at fair market value, is wandering into the territory of criminal tax evasion. The fact that your brokerage sends you a 1099-B showing a loss would not change this. Although it is a highly unusual situation, if you were able to accomplish this without violating any non-tax laws, it would probably be correct to: (a) report gain equal to the difference between actual fair market value and your basis in the stock; and (b) report an IRA contribution equal to this difference. You also would likely need to attach a schedule to your tax return explaining exactly what was done and perhaps file a Form 8275 disclosure statement. The audit could be interesting though.
Wash sale rule would apply here.
In my view, this is likely not a wash sale, although for fairly technical reasons. The sale appears to be a sham transaction with no non-tax business purpose. As a result, it is appropriately recharacterized, for tax purposes, as a sale of the stock for cash at fair market value, a contribution of the proceeds to the IRA, and a purchase of the stock in the IRA. Because the deemed sale is at fair market value (which is presumably at a gain), the wash sale rule would not apply.

Fair enough that, if you actually respected the sale at a loss, then there would be a wash sale, which is another reason any apparent "loss" would be disallowed.
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HootingSloth
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by HootingSloth »

mmcmonster wrote: Fri Jun 11, 2021 2:38 pm
HootingSloth wrote: Fri Jun 11, 2021 2:22 pm[...]Selling the stock for cash, contributing that cash to the IRA, and buying the stock in the IRA seems fine, but I don't think that is what the OP was getting at.
If I was the IRS, I would think the point of this exercise is to bypass limits set on IRA contributions.

Tread carefully. Preferably in a different direction.
Executing the trade as a sale for cash at the real fair market value, followed by a contribution of that cash to the IRA, does not bypass the limits. I agree that doing what the OP originally suggested is highly problematic.
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Orange_Philosophy
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by Orange_Philosophy »

Contrary to the "don't do it"... Assuming you do, can you not create a buy for a very odd number of shares - say 993 shares and do an all or nothing? Same on the sell side? While someone may want to buy it they'll have a difficult time seeing the specific price and acting on it before your transaction goes through automatically. I'm not sure the legal aspect of this either way and it very well could be problematic.
afan
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by afan »

I would find out whether the maneuver is legal before trying it.
It clearly has the purpose of avoiding capital gains tax on the amount sold in the taxable account. As noted by others, this might also have the effect of making a contribution to the IRA. If you are allowed to contribute that much to the IRA, then this second issue should not be a problem on substance. It might be a problem on form.

With the speed of markets, I would not count on any human being able to make the trade too fast for others to jump in. Just because the stock trades rarely, that does not mean there are no computers set to immediately buy lots of any stock that come up at arbitrage prices. If your market maker does not do it themselves, the whole HFT world is out there. It can move much faster than what would seem to a human to be simultaneous entries. Latency from your computer to your broker alone would be an eternity compared to the speed at which the prices adjust and trades are executed.

Maybe some combination of snail mail and telegraph 150 years ago might have worked.
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TropikThunder
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by TropikThunder »

Caduceus wrote: Thu Jun 10, 2021 11:01 am The over-the-counter version of the stock goes for ages without a single trade. Like, maybe, two weeks can go buy without a single buy or sell. The exact same security that is listed on the foreign exchange has lots of liquidity.
Ok there are no buy or sell transactions. But how do you know there aren’t any pending GTC trades sitting there waiting for a good price? Those can sit there lurking for 90 days. Worse case scenario, your well-below market sale goes through - but not to you.

Or do OTC exchanges not work like that?
GrowthObsessed
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by GrowthObsessed »

Don't know if this is the same on all brokers but on Fidelity you would not be able to enter a 1/10th limit sell order on a stock, $10 for $100 in your example. Max would be 50% of the last trade price.

Just mentioning it for the sake of full consideration. You never know who might actually end up buying your shares, even on an illiquid stock.

And for even more consideration, I'd wonder at the suitability of investing in a stock that has no liquid trading. If you actually wanted to sell the shares but nobody was buying --- you're stuck. And that's not a good position to be in.
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by fyre4ce »

You are not allowed to engage in self-dealing transactions with an IRA. For example, you aren't allowed to make a hard money loan at 25% interest from your IRA to yourself, a business you control, or a family member. Otherwise, this could be used to effectively circumvent contribution limits. (You are allowed to make hard money loans to unrelated parties at market rates from a "self-directed" or "checkbook" IRA.) There are more subtle ways that people run afoul of this rule, like owning an investment property inside an IRA, and acting as a property manager or performing handyman repairs. The value of your labor would be an effective contribution; you have to hire unrelated parties at a fair market price to perform all this work, so it acts like a pure investment. If you are caught doing things like this, you can face penalties and the IRS can force the liquidation of your IRA, triggering taxes and more penalties. Buying a security from yourself at a sub-market price would definitely qualify, even if you were able to do it through a public exchange.

I also don't think your below-market limit order to sell would work, for two reasons. First, limit orders at brokerages I'm familiar with sell at the limit price or higher (and, buy orders buy at the limit price or lower). The market maker would fill the sell order by executing it with the lowest buy order they are holding that's more than $10. Who knows what that price is - $20, $50, $99.99 - but it wouldn't matter because I would expect an instant transaction. Second, even if there were a way to tell your brokerage to only fill the order at $10 and no higher, I'd expect someone else to snatch it up before you could click screens and place the buy order inside the IRA, even for a very thinly traded OTC security.

So, no, I don't think this would work legally or practically.
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by fyre4ce »

Orange_Philosophy wrote: Fri Jun 11, 2021 3:14 pm Contrary to the "don't do it"... Assuming you do, can you not create a buy for a very odd number of shares - say 993 shares and do an all or nothing? Same on the sell side? While someone may want to buy it they'll have a difficult time seeing the specific price and acting on it before your transaction goes through automatically. I'm not sure the legal aspect of this either way and it very well could be problematic.
You can put in an all-or-nothing sell order, but that doesn't mean the buyer also has to have an all-or-nothing too. If OP puts in an all-or-nothing sell order for 993 shares at $10, any non-all-or-nothing buy orders the market has for >= 993 shares between $10 and $100 would trigger a transaction.

Now, if the sell order were some enormous number of shares that no other trader was likely to have orders in for, I'd still be worried, because I don't think all-or-nothing precludes the market maker from filling the order with multiple buyers at the same time. Academically I'd be interested in whether market makers would do this, but putting a 90% sub-market order out for mega-bucks worth of stock is way too big a risk to be worth taking. It also violates IRA self-dealing rules, as I described in the above post.
mmcmonster
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Re: Am I allowed to sell stock at a lower price than the market value?

Post by mmcmonster »

HootingSloth wrote: Fri Jun 11, 2021 2:43 pm
mmcmonster wrote: Fri Jun 11, 2021 2:38 pm
HootingSloth wrote: Fri Jun 11, 2021 2:22 pm[...]Selling the stock for cash, contributing that cash to the IRA, and buying the stock in the IRA seems fine, but I don't think that is what the OP was getting at.
If I was the IRS, I would think the point of this exercise is to bypass limits set on IRA contributions.

Tread carefully. Preferably in a different direction.
Executing the trade as a sale for cash at the real fair market value, followed by a contribution of that cash to the IRA, does not bypass the limits. I agree that doing what the OP originally suggested is highly problematic.
Yes, sorry. I meant the OP's original plan seemed to skirt IRA contribution rules.
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