If you are selling at a gain no problem.
If you are selling at a loss then the loss will be a disallowed wash sale. To avoid a wash sale you must not buy the same stock for 30 days before or after the sale.
if you sell at a loss in your taxable a/c and buy the same security within 30 days in your IRA it is likely your broker will not adjust for the wash sale. this is something you'll have to do manually come filing time. what's more the "disallowed loss" disappears forever. you never get a tax benefit
The wash sale rules were put into place to avoid year end games; not necessarily between a taxable and non taxable account, but between two different accounts.
The wash sale rules under Section 1091 can be a little complicated and the basis of the new securities could be adjusted:
I don't plan on running the numbers with any scenarios. In general, you should just avoid this issue and wait 31 days.
You can also not come under the wash-sale rule if the security you purchase is not “substantially identical” to the security sold at a loss. So it might be the case that if you sell an SP500 index fund and buy a Total Market index fund, or sell Ford and buy GM, that those replacement securities might not be "substantially identical." but close enough to keep you invested as you want to be for 30 days when you sell again and buy what you really want. (It would be a good idea to research if there is any guidance on what “substantially identical” means.)
The wash sale rules under Section 1091 can be a little complicated and the basis of the new securities could be adjusted:
a) if the sales price was less than the repurchase price, then the basis of the new securities is deemed to be the basis of the securities sold plus the difference between the repurchase and the sale prices.
b) if the sales price was more than the repurchase price, then the basis of the new securities is considered to be the basis of the securities sold minus the difference between the sale and the repurchase prices.
do some examples for yourself but the basis of the new securities is simply their cost plus the disallowed wash sale amount.
@Mike9241 while that may "generally" work, that is not how the code reads.
My two bullets represent the language in the statute.
My last comment on revenue ruling 2008-5 represents a case where there was no basis adjustment allowed in a wash sale, however, as noted, there are not sufficient facts to determine why that is the case. Under those rules, it would appear that there would be no increase (or decrease) in basis if the sale and repurchase prices were equal.
I've done plenty of examples, so not sure I need to do any more.
@jtax wrote:
....(It would be a good idea to research if there is any guidance on what “substantially identical” means.)
It is unlikely that you will find anything, that has a significant bearing, directly from the IRS.
Pending mergers aside, it is rather clear that shares in two different corporations are not substantially identical, nor are two different actively managed mutual funds.
I believe the consensus, at least in the investment company, is to steer clear of buying/selling (within the wash sale rule period) index funds (passive) that are based on the same stock index but offered by different firms.
your citing examples in the regs 1091(d)
1091(d)
(d)Unadjusted basis in case of wash sale of stock
If the property consists of stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility (under this section or corresponding provisions of prior internal revenue laws) of the loss from the sale or other disposition of substantially identical stock or securities, then the basis shall be the basis of the stock or securities so sold or disposed of, increased or decreased, as the case may be, by the difference, if any, between the price at which the property was acquired and the price at which such substantially identical stock or securities were sold or otherwise disposed of.
cost $400 sell at $300 wash sale loss $100; buy at $300 now tax basis per you $400 or per me $300+ $100 =$400. technically you are correct. that's how the code reads but mathematically the math works my way.
if you sell 100 shares at a loss today. and buy 100 shares of the same stock tomorrow. the wash sale rules apply. the loss will not be allowed for tax purposes. the buy can be in the same account, a different a/c of yours or your spouse's, or even an IRA. where you or your spouse are the primary beneficiaries. the loss is added to the tax basis of the shares you bought. if you buy 200 shares only 100 shares will be subject to the wash sale rules. if the purchase is done in the same account as the sale the broker should adjust the reported gain/loss on the year-end 1099-B. to reflect the wash sale. if a different a/c or IRA you'll have to make a manual adjustment.
say on day 1 you buy 100 shares of x
the next day you but another 100 shares of x
the next day you sell 100 shares of x at a loss using FIFO
the 2nd purchase causes the wash sale
using lifo the first purchase would cause a wash sale
In "Revenue Ruling 2008-5", the IRS explained that when shares are sold in a non-retirement account and substantially identical shares are purchased in an IRA within 30 days, the investor cannot claim tax losses for the sale, and the basis in the individual's IRA is not increased.
https://www.irs.gov/pub/irs-drop/rr-08-05.pdf
As @Rick19744 explained previously, the problem is avoided if you wait 31 (or more) days between the transactions.
@zpc74 wrote:
lawyer lingo. what is it in English?
Here's the wash sale rule as plain as I can make it.
Suppose you buy a share of stock in 2020 for $10. In 2022 it is worth $5. You sell it to claim a $5 tax deduction. You immediately re-buy the share for $5, and sell in in 2023 for $8. You may think you have a $5 loss you can deduct in 2022 and a $3 gain you report as income in 2023, but the wash sale rule means you ignore the loss in 2022, and report a $2 loss in 2023 ($8-$10 basis).
The wash sale rule is triggered if you sell an investment for a loss, and then rebuy the same or substantially similar investment within 31 days. The wash sale rule even applies if you sell a stock that is inside an IRA and re-buy it outside the IRA, or vice versa.
The rule is not triggered if you have a gain. Suppose you buy a share of stock in 2020 for $10. In 2022 it is worth $15 and you sell it. You immediately re-buy the stock, and in 2023 you sell it at $12. In this case you report the $5 capital gain as income in 2022 and the $3 loss in 2023.