Beverly Goodman

More Wash-Sale Matters for the Tax Nerds

 

If this is the case, you cannot avoid paying tax on the gain by adding it to the lower basis in your new shares; you must report the profit to the IRS on Schedule D of your 1040. Sorry.

If someone sells a stock in a brokerage account and then buys it back 25 days later in an IRA account, how would the IRS ever learn of the buyback since there are no 1099s issued for stock transactions within IRAs?

Scott A.

Well, Scott, I'm sure you're speaking hypothetically, but let me be blunt: It's your responsibility to tell the IRS. To not do so would be cheating, and if the IRS audited you for any reason and learned of the deception, you could owe back taxes, interest and -- depending on how egregious the error and its suspected motivation -- possible criminal charges.

"Just because an institution isn't required to send you and the IRS a 1099 doesn't mean you don't have to report the transaction," says Davis, Calif., CPA Mark Castellucci. "It's up to you to file your taxes correctly."

And that means properly reporting such transactions on Schedule D of your 1040. In the instructions to the Schedule D (you can find both the form and its instruction booklet at the IRS Web site) there's a worksheet to help you figure how to report a loss from a sale. Included on that worksheet is a line for a wash-sale disallowance, which then adjusts the allowable loss -- and that's the figure that gets transferred to the Schedule D.

Now, realistically, it's pretty uncommon for the IRS to audit a taxpayer so thoroughly that they request the trading records of a taxpayer's IRA. But if they did become aware of the situation, well, let's just say that would be just the beginning of a whole series of problems. If you have any more questions in that vein, you're probably better off asking a tax lawyer.

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