You may already be familiar with the Wash Sale Rule for buying and selling securities. Briefly, when you sell a security at a loss, if you’ve purchased it within 30 days (either before or after the sale), then the loss is disallowed for tax purposes, and the basis of the newly-purchased stock is then increased by the amount of the disallowed loss.
The general rule disallowing the loss is relatively clear, but what’s not clear to many folks is that this applies to all accounts that you and your spouse own – including IRAs. How can capital losses be considered within IRAs, you may ask?
Here’s an example: Say you purchased 100 shares of ABC stock in your taxable account at $50 per share several years ago. After holding the shares for quite a while and watching them languish and continue to lose value, you decide to sell the shares at $40 so that you can at least take the tax loss for some minimal benefit from the situation.
Then, a week after you sell the shares, you learn that ABC is ready to introduce a brand-new, absolutely revolutionary, widget. This new widget is expected to blow the industry away – and you want to get in on the action. So, realizing that you just sold 100 shares for a loss, you have your spouse buy 100 shares in his IRA for $43, 8 days after you sold the original 100 shares.
Bingo. You just triggered the wash sale rule, disallowing the original loss for tax purposes. This is because in considering the wash sale, all accounts, IRA and otherwise, for you and your spouse, are included. Unfortunately in this case your tax loss is gone forever since your IRA purchase has no tax basis.
Had the accounts been different – that is, if the original purchase had been made in your taxable account and the subsequent purchase made in another (or the same) taxable account, you’d at least have your basis of $43, plus the disallowed loss of $10 (new basis = $53) against which future capital gains or losses would be calculated. Additionally, if you had only waited 30 days from the original sale of the shares of ABC, you could have made the purchase in either account with no wash sale impact.
So be careful as you make tax loss moves – consider all of the ramifications of the wash sale rules.