Tax Time: Who Needs to Worry About the Wash Sale Rule?

Beverly,

Do traders need to worry about the "wash sale" rule? If so, what does the IRS require in order to claim the designation of trader? Is it based on number of trades, or something else?

Thanks,

Jitender S. Sarpal

Jitender,

The wash sale rule prevents taxpayers from claiming a loss on securities if the exact same ("substantially identical" in tax parlance) securities are purchased within 30 days of the sale. In other words, if you sell 100 shares of Microsoft at a loss on March 30, but also buy 100 shares either 30 days before the sale or within 30 days after, the Internal Revenue Service won't allow you to claim the loss on that sale. The loss is really disallowed only temporarily -- the basis of the new shares is adjusted to reflect the money lost in the sale, so the loss is accounted for when the new shares are sold.

Sorry, Jitender, but the wash sale rule applies to all classes of taxpayers, including corporations. The only exception is made for securities dealers for losses sustained in business transactions. (And don't even think about claiming you're a dealer: Dealers hold an inventory of securities to sell to others, and report their profits as business income and losses under special tax rules. If you need to ask, you're not a dealer.)

As to your second question, the IRS hasn't issued clear-cut rules as to when someone can claim trader status. Generally, the definition of trader (for these purposes) is someone who buys and sells securities in an effor to profit from daily price swings, whereas "investors" buy and sell securities for long-term capital gains and short-term income. For more on the distinctions between traders and investors, see Sour Stocks are More Taxing on Investors Than Traders.

Beverly,

I've had an IRA question that I haven't seen addressed (and if you did previously and I missed it, I apologize). I'm a retiree, via disability, 44 years old. I live humbly off my pension income, plus dividends, interest and hopefully capital gains. Am I able to contribute to an IRA (regular or Roth) though I have no work income? I've tried finding this out through reading the IRS guides, but remain somewhat confused regarding the answer.

Thanks,
Gordie Dickinson

Grants Pass, OR

Gordie,

Unfortunately, the rules are pretty clear -- you can only contribute earned income to an IRA, be it a traditional IRA or a Roth. In other words, you can't take your pension income or dividend payout and put it into an IRA.

If you want to stash some extra money in your IRA, though, you can consider part-time or freelance work. But barring work income, you won't be able to contribute to an IRA.

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