Don't Get Crafty With the Wash-Sale Rule

Beverly,

I've seen conflicting views on how the wash sale rule applies when IRAs are involved. If I remember correctly, an IRA has special ownership status, like a trust, so it could be argued that it does not. On the other hand, the beneficiary of the IRA has beneficial ownership of the shares so it could be argued that it does.

If someone sells 100 ZYX in brokerage account A for a loss and then 25 days later buys 100 ZYX in IRA account B, does the wash sale rule apply? If the wash sale rule does apply, then the basis of the shares in the IRA would be adjusted upwards. Since gains and losses in an IRA are meaningless tax-wise the loss is in effect being denied and not delayed.

It would seem unfair that the wash sale rule would apply when an IRA is involved, but since many parts of the tax code are unfair it wouldn't surprise me if it does.

Thanks,

Gerald Walls

---

Gerald,

Quite a number of TheStreet.com readers have written to ask if they can claim a loss on stock sold in a regular brokerage account and repurchase the same stock within 30 days inside of an IRA without running afoul of the wash sale rule. What a crafty lot you all are.

Unfortunately, the short answer is that the Internal Revenue Service probably won't look kindly on such shenanigans. The long answer, though, is that there is no definitive answer -- although musing about the structure of IRAs is ultimately irrelevant.

"The wash sale rules aren't real clear on this issue, but the weight of authority is that such a strategy wouldn't work," says Mark Luscombe, a CPA and tax attorney with CCH, a provider of tax research. "The reason, though, is not because of the wash sale rule, but primarily because of the rules on the disallowance of a loss on a sale to a related party."

Taxpayers are not allowed to claim a loss on any sales to siblings, parents, grandparents, children, grandchildren or a spouse. Losses may also be disallowed in sales between controlled companies, a trust and its creator, a trust and a beneficiary, or a tax-exempt organization and its founder, according to J.K. Lasser's Your Income Tax.

"In the discussion of these rules, it seems that an indirect sale structured in a manner something like this would be treated as an indirect sale to a related party," Luscombe says. "My conclusion is that it doesn't work -- or probably doesn't work."

As for the issue of fairness ... that's a matter of opinion. You could easily argue that a loophole allowing families to transfer assets between each other (or even within their own portfolio) at a loss and then get a tax break on top of it is unfair as well.