Ask Bev: Looking at Wash Sales, Covered Calls

Stocks and mutual funds that automatically reinvest your dividends can indeed trigger the wash-sale rule -- but only if you continue to hold some shares. So if you sell all 100 shares of Johnson & Johnson -- including whatever shares you received as a dividend payment -- you won't incur the wash-sale rule and will be able to claim the loss.

But if you sell only, say, 50 shares, but receive a dividend on all 100, you will run into the wash-sale rule. Any additional shares you receive as a dividend will prevent you from claiming a loss on that number of shares sold. So if you receive a dividend equal to two shares, you'll be able to claim a loss only on 48 shares. You'll adjust the basis of the two shares received as a dividend to reflect the disallowed loss.

Dear Beverly,

Scenario: Two accounts: one is self-managed; I purchased 1,000 shares of XYZ on 12/15/03. Still hold at 1/22/04. The other account is managed by a large institution. Sold 500 shares of XYZ at a loss on 12/31/03. The institution was doing some year-end "house cleaning" and did not know that 1,000 shares were purchased in the self-managed account.

Do the wash-sale rules apply here with two separately managed investment accounts?

Thanks for your help.

Shawn D.

Unfortunately, there's no clear answer for this. Typically, the IRS looks at the taxpayer's entire portfolio, not any one individual account. So even though one of your accounts is managed by an institution, it's the overall picture that concerns the IRS -- that's why you can't avoid the wash-sale rule by selling stocks at a loss in a brokerage account and repurchasing the same shares in an IRA.

You don't specify what type of account is managed by this "large institution." If it's a broker discretionary account -- wherein your broker has free reign to make buying and selling decisions without acquiring permission for each move -- that's still essentially an account under your control. And that means any tax consequences that result from your account manager's buying and selling are very likely yours and yours alone, according to Mark Luscombe, a CPA and attorney with CCH, a tax-law research firm.