Taxation & Estate Planning

WASH SALE RULE LOOPHOLE CLOSED

By Charles Rubin

Common year-end tax planning advice is to consider selling publicly traded securities that have lost value, so as to obtain a loss deduction to offset otherwise incurred gains. However, as a practical matter, a taxpayer may like a particular stock and want to keep it in his portfolio. Therefore, thoughts are given to selling the stock to incur the loss, and then quickly buying it back to put it in the portfolio.

Code Section 1091, also known as the "wash sale rule," limits the ability to do this. If a share of stock or securities are sold at a loss, and substantially identical stock or securities are acquired within 30 days (before or after) the sale, the loss is disallowed. Some taxpayers have sought to get around the loss sale rule by repurchasing the stock or securities in an IRA or Roth IRA account, on the theory that the repurchaser is not the taxpayer, but a different legal entity and taxpayer.

In Revenue Ruling 2008-5, the IRS has advised that it considers the IRA or Roth IRA as effectively the same person as the taxpayer, and will apply Section 1091 to these types of purchases and resales. It based its ruling on a 1930's case that held that a trust controlled by a taxpayer was considered a mere agent for the taxpayer, allowing the application of the predecessor to Section 1091 to a sale by the taxpayer and a repurchase by such a trust.

Interestingly, the Ruling also disallows the use of Section 1091(d), which preserves the built-in loss in the property repurchased that is subject to Section 1091 through an upward adjustment in basis equal to the disallowed loss. No explanation is given, but presumably this is done in light of the tax-exempt nature of the IRA or Roth IRA.

Rev.Rul. 2008-5, 2008-3 IRB

Full post as published by Rubin on Tax on December 22, 2007 (boomark / email).