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Wash Sales and IRAs
by Kevin McCormally

Here's a question we hear repeatedly: I sold stock in a regular, taxable account last year at a loss and bought it back immediately in my IRA because I have faith that the stock will recover. Can I claim the loss or is it snuffed out by the "wash sale" rule?

It's a good question and it keeps coming up, in part, because the IRS can't get its act together to issue a definitive answer.

First, the wash sale rule is designed to prevent taxpayers from making a chump of Uncle Sam by selling securities for a loss, claiming the tax benefit of the loss, and then buying back the same securities within 30 days. The way the government sees it, such a quick turn around is a "wash", leaving the investor in the same economic position. So, why allow a tax loss?

But, is the IRA considered the same taxpayer?

Many observers say yes, but attorneys at the IRS assure us that the answer is NO.

Buying stock back inside an IRA within the 30 day window is not a wash sale, which means the loss in the taxable account can be reported on a Schedule D.

Note this: When the wash sale rules come into play, you don't really lose the tax benefit of the loss. Instead, the basis of your newly acquired shares includes the disallowed loss -- meaning the loss's tax-saving power will be resurrected when the new shares are sold.

If the wash sale rule scotched the loss on the IRA buy-back, however, the loss would indeed be lost forever because a stock's basis only comes into play in IRAs in the very rare cases where losses are deductible.