Articles:

Wash Sales and Your IRA

by Roy A. Lewis, E.A. - January 18, 2008

For many years the Fool Community specifically and the tax community at large has debated the issues relative to wash sales and how they relate (or don't relate) to IRA accounts (both Traditional and Roth). If you're unfamiliar with the rules relating to wash sales, then take a few minutes to read the linked article.

Now that you have the appropriate background on wash sales, the typical question went like this:

    "What if I sell stock at a loss in my 'regular' account and then turn around and repurchase that same stock in my IRA account? Would the wash sale rules still come into play?"
My answer (consistently over the years) was that the loss would not be recognized in your personal account, and would therefore not be deductible on your personal tax return. And that created a fairly large outcry among Fools and other tax professionals alike. They not only questioned my intelligence, but also my heritage (no…I do not have a donkey anywhere in my family tree).

Various readers would pepper me with the "facts" that since an IRA account is a separate account, that the wash sale rules would not apply, and the personal loss would be allowable. I continued to remain of the opinion that since the taxpayer has control over the IRA account, the IRA account would be "ignored" when dealing with the wash sale rules, and that the wash sale rules would apply, and that any loss realized from the personal account would not be deductible on the individual income tax return.

It appears that good things happen to those who wait.

Finally the IRS has addressed this issue. In Revenue Ruling 2008-05, the IRS essentially took the same position that I had taken all along (the sound you hear in the background is me patting myself on the back). The IRS came out clearly on this issue. Here is my version of the example that they used in the RevRul:

Alex, an individual, owns 100 shares of X Company stock with a basis of $1,000. On December 20, 2007, Alex sells the 100 shares of X Company stock for $600.

On December 21, 2007 (well before the 30 days had expired), Alex causes an individual retirement account (or a Roth IRA account) established for the exclusive benefit of Alex or Alex's beneficiaries, to purchase 100 shares of X Company stock for its then fair market value of $1,000.

You can (and should) read the entire RevRul if you're at all interested in this issue. It relies on the same ruling (a 1933 case) that I used in my original analysis. It really is interesting reading to understand why the taxpayer has "dominion and control" of the IRA account. But the bottom line is that the loss Alex realized on the sale of the stock will not be allowed. It will simply be a non-transaction for tax purposes. He can't adjust the basis of any other shares that he owns in his personal account, nor is he able to adjust the basis in the shares that were purchased in his IRA account.

I'm afraid that some of you have been planning "fast and loose" with this rule in the past. And now, with the market on the downswing, you might be getting cute with the wash sale rules. You might want to rethink you position.