A Sneaky New Twist on the Wash-Sale Rules

>>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.