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>>For example, sell in the Roth at a loss of $500, then buy the same stock the same day in a taxable account for $1000; later when I sell in the taxable account, is my basis $1000 or $1500?<<

Since the IRS rules do not specify, I believe it is safest to simply use the $1000 purchase price and forfeit the $500 write down. Otherwise you'd have to explain where the added basis comes from.

What about the reverse situation, where a stock is sold in a Roth IRA at a loss and then bought in a taxable account within 30 days? Is the loss amount added to the cost basis in the taxable account? For example, sell in the Roth at a loss of $500, then buy the same stock the same day in a taxable account for $1000; later when I sell in the taxable account, is my basis $1000 or $1500?

Straight from the IRS Ruling: 'This ruling provides that if an individual sells stock or securities for a loss and causes his or her IRA or Roth IRA to purchase substantially identical stock or securities within a specified period, the loss on the sale of the stock or securities is disallowed under section 1091 of the Code, and the individual's basis in the IRA or Roth IRA is not increased by virtue of section 1091(d).'

Thanks for looking that up for us. Now we see that this rule is really targeted at Roth IRA's. Before the rule, you could sell stock while it was down and take a write-off, then re-buy in your Roth IRA and not pay taxes on any subsequent gains. Now you just don't take the write-off and all is fair because it's as if you just transferred the asset into your Roth and are pretending you bought it in the Roth to begin with.

With a traditional IRA (or 401K), before the rule you could escape the wash sale rule and use it for early tax write-offs in a year w...(Read more of this comment)here you make a lot of money. Now you would never want to do this because you simply lose the tax write-off forever! I understand why they put in the rule, but I think they should allow the cost basis to be increased in the traditional IRA and 401K situation so that it works like a normal wash sale.

But for the Roth, I can see why they would not allow the cost basis write up. You don't pay tax on gains in a Roth like in other deferred tax accounts. So you could simply sell when a stock is down, write it off, re-buy in the Roth. Then when the stock goes up again, sell in the Roth (no tax on gain!) and re-buy in your regular account. Wash, rinse, repeat, and get write-offs on losses without taxes on gains! Wow, I bet smart folks were doing this in droves! Too bad I didn't think of it before now :)(Show less of this comment)

DISREGARD MY LAST POST. I missed some edits. This one makes more sense!

With regard to what constitutes 'substantially identical' securities in the world of ETF's and mutual funds, the IRS has not made a specific ruling on this (yet). A S&P 500 mutual fund from one company and a S&P 500 mutual fund from another company would be 'substantially identical' since they own the exact same stocks. Any actively managed fund would be unique in my opinion (and not 'substantially identical' to another), even if they both have the same general type of securities -- for example large cap domestic stocks. We'll have to wait for the IRS to be more specific on this. In the meantime, it pays to play it safe. Keep those sales and purchases of potentially identical funds more than 31 days apart.

With regard to what constitutes 'substantially identical' securities in the world of ETF's and mutual funds, the IRS has not made a specific ruling on this (yet). The wash-sale rule apparently applies to securities. For instance, you can't sell A S&P 500 mutual fund from one company and another S&P 500 mutual fund from some other company would be 'substantially identical' since they own the exact same stocks. Any actively managed fund would be unique in my opinion (and not 'substantially identical' to another), even if they both have the same general type of securities -- for example large cap domestic stocks. We'll have to wait for the IRS to be more specific on this. In the meantime, it pays to play it safe. Keep those sales and purchases of potentially identical funds more than 31 days apart.

Straight from the IRS Ruling: 'This ruling provides that if an individual sells stock or securities for a loss and causes his or her IRA or Roth IRA to purchase substantially identical stock or securities within a specified period, the loss on the sale of the stock or securities is disallowed under section 1091 of the Code, and the individual's basis in the IRA or Roth IRA is not increased by virtue of section 1091(d).'
http://www.irs.gov/irb/2008-03_IRB/ar08.html

Here's another article on the issue of IRA's and wash sales. http://www.themoneytimes.com/articles/20080131/wash_sales_and_your_ira-id-1016594.html
Reading it, it makes sense to me why the IRS doesn't allow you to take a tax deduction when you sell at a loss in a taxable account and then turn around and buy the same security in another account (be it ROTH, regular IRA or 401K). The truth is, you are NOT experiencing a loss if you rebuy the same security in a short period of time. You are just reshuffling which account you own the security in.

This article is a bit unclear about what happens in the retirement account, but we can try to deduce it ourselves. If I sell the security and then buy something similar in a retirement account, the first thing we know is that we can't deduct the loss from the sale on our taxes. That's the easy part. Now suppose you bought in a traditional IRA. It seems that here that you would increase the cost basis of what you bought and have an unrealized loss to offset any unrealized gains in the IRA. Then you don't have to pay tax on those gains at retirement. This is slightly bad because the whole point of a traditional IRA is to defer the taxes until later in life. This the opposite - deferring the write-offs until later in life. Kind of defeats the purpose of the IRA. With a ROTH, it's even worse because there's no taxes to defer in a ROTH. Therefore, you will have lost the entire write-off. I can't believe they mean to include ROTH IRA's in this rule because it would be patently unfair and I'm...(Read more of this comment) sure it could be easily challenged. I would also wager the traditional IRA case could be challenged as well but it's a little less clear.(Show less of this comment)

My understanding is that an IRA account is relevant to the wash sale rule in a case where the taxpayer has both an IRA and a taxable account. The purchase in the IRA of a *substantially identical' investment would trigger the wash sale rule on a sale in the taxable account if the purchase ocurred 30 days before or after the sale. I still would like to know what *substantially identical* means in the case of mutual funds.

Does anybody know what is meant by substantially identical in the case of mutual funds. Say I want to sell Fidelity Mega Cap and buy Fidelity Blue Chip, both large cap funds but with slightly different emphasis. Are they substantially identical. What is I buy Fidelity Balanced instead, a mix of large cap and bonds.

The following quote from

http://www.smartmoney.com/comments/?story=comments&action=add&EntryID=23611&storytitle=A%20Sneaky%20New%20Twist%20on%20the%20Wash-Sale%20Rules&smList=letters@smartmoney.com&pubDate=08-06-2008

'Competent tax professionals would probably tell you if it quacks like a duck, it's considered a duck by the IRS,' says BGI spokesman Tom Taggart. 'So, switching from one ETF tracking the S&P 500 to another tracking the same index is shaky ground at best.'

Selling Wachovia and buying Lehman is not a wash sale becase they are not similar in a legal sense. The same for selling GM and buying Ford. Bottom line, selling one company in a given industry to buy another is not a wash sale.

However if you have Spiders (SPY) and sell them, but later buy Ishares S&P 500 (IVV) or say Fidelity's S&P 500 open ended fund, I believe that would trigger wash rules because these are arguably similar, identical even.

dbandit, Are you sure about this? A 401K and an IRA are similar in that there is no tax until you withdraw the funds, and contributions to both can be made with pre-tax dollars, correct? So upon withdrawal from either a 401k or traditional IRA, profits are taxed. If an accountholder has purchased a security in the IRA or 401K that triggers the wash sale rule, then the basis would be adjusted according to the law... thus the amount of profit to be taxed on withdrawal would be affected. If I am wrong, please explain.

There are no capital gains or losses in a 401k. There is no tax at all until you withdraw funds, and then (for normal withdrawals) the tax is based on the amount of the withdrawal that you didn't contribute to the plan. So in that case, the wash rule is irrelevant...ddbandit,cpa

Wachovia and Lehman are not substantially identical.
A S&P mutual fund is not even identical to an S&P ETF.
A and B shares of the same stock are likely considered identical.
Joe
http://www.blog.joetaxpayer.com

Does anyone out there know if the wash sale rules apply to private foundations? I ask because if it doesn't, its a great way to manage our taxable gain (we do pay tax on net investment income at a 1% or 2% rate).

I sell Wachovia and within 30 days buy Lehman. Is this a wash sale? These are similar securities? In Bill's two articles he has given examples of buying and selling the same security ... XYZ and a Bank. Please help!!

We can only *hope* this doesn't apply to 401K-type accounts. Many people, like me, buy index funds every month for my 401K. Does this mean I can't ever sell a 'substantially similar' index fund in my investment acct and claim the loss? Crazy.