Solved: How are wash sales involving spouses treated when the spouse is non-resident?
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noelroy
New Member

How are wash sales involving spouses treated when the spouse is non-resident?

I am a US citizen, and my spouse is a non-resident alien. I sell shares at a loss, and my spouse acquires substantially identical shares within the wash sale window, so I cannot claim the loss. If I had purchased the shares myself, I would get to add the loss to the cost base of the purchased shares. If my spouse were a US resident, he could get to add the loss to his cost base. Since neither is true, am I out of luck in recovering the loss though a cost base adjustment?


1 Best answer

Accepted Solutions
Anonymous
Not applicable

How are wash sales involving spouses treated when the spouse is non-resident?

The answer to your issue is not clear.  The IRS has stated it believes a stock sold by one spouse at a loss and purchased within the restricted time period by the other spouse is a wash sale.  However, different courts have reached different conclusions especially when the spouses had separate accounts and acted independently.

were the sale and purchase made in different accounts and did each of you act independently?

if yes, you may want to take the position there was no wash sale.  to protect yourselves, you may want to add a statement to your return describing what took place and your reason for treating the transaction the way you did. 

it you report it as a wash sale it is also unclear as to whether or not the non-deductible loss can be added to your husband's basis. If his income is not reported for US tax purposes, which I assume is the case, then the basis adjustment issue is moot.  There is a case where a taxpayer sold securities at a loss and immediately repurchased them in an IRA.  The court disallowed the loss and would not allow the the basis of the IRA to be increased for the loss.  

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3 Replies
TomYoung
Level 13

How are wash sales involving spouses treated when the spouse is non-resident?

I don't know the answer to you literal question but, of course, if you file jointly the issue is moot as the two of you file as a single "tax unit."

The IRS discusses joint filing in your circumstances:

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Nonresident Spouse Treated as a Resident
Election to File Joint Return

If, at the end of your tax year, you are married and one spouse is a U.S. citizen or a resident alien and the other is a nonresident alien, you can choose to treat the nonresident as a U.S. resident. This includes situations in which one of you is a nonresident alien at the beginning of the tax year, but a resident alien at the end of the year, and the other is a nonresident alien at the end of the year.

If you make this choice, the following rules apply:

    You and your spouse are treated, for federal income tax purposes, as residents for all tax years that the choice is in effect.  You and your spouse are treated as residents for your entire tax year for the purpose of your federal individual income tax return, and for the purpose of withholding federal income tax from your wages. However, you may still be treated as a nonresident alien for the purpose of withholding Social Security and Medicare tax. Refer to Aliens Employed in the U.S. – Social Security Taxes
    You must file a joint income tax return for the year you make the choice (but you and your spouse can file joint or separate returns in later years), and
    Each spouse must report his or her entire worldwide income on the joint income tax return.
    Generally, neither you nor your spouse can claim tax treaty benefits as a resident of a foreign country for a tax year for which the choice is in effect. However, the exception to the saving clause of a particular tax treaty might allow a resident alien to claim a tax treaty benefit on certain specified income.
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Anonymous
Not applicable

How are wash sales involving spouses treated when the spouse is non-resident?

The answer to your issue is not clear.  The IRS has stated it believes a stock sold by one spouse at a loss and purchased within the restricted time period by the other spouse is a wash sale.  However, different courts have reached different conclusions especially when the spouses had separate accounts and acted independently.

were the sale and purchase made in different accounts and did each of you act independently?

if yes, you may want to take the position there was no wash sale.  to protect yourselves, you may want to add a statement to your return describing what took place and your reason for treating the transaction the way you did. 

it you report it as a wash sale it is also unclear as to whether or not the non-deductible loss can be added to your husband's basis. If his income is not reported for US tax purposes, which I assume is the case, then the basis adjustment issue is moot.  There is a case where a taxpayer sold securities at a loss and immediately repurchased them in an IRA.  The court disallowed the loss and would not allow the the basis of the IRA to be increased for the loss.  

View solution in original post

noelroy
New Member

How are wash sales involving spouses treated when the spouse is non-resident?

This sounds reasonable. Publication 550 charter 4 states under "Indirect transactions" that "You cannot deduct your loss on the sale of stock through your broker if, under a prearranged plan, a related party buys the same stock you had owned. This does not apply to a trade between related parties through an exchange that is purely coincidental and is not prearranged" which seems to support your point. It also states under "Transfers Between Spouses" "Generally, no gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse or, if incident to a divorce, a former spouse. This nonrecognition rule does not apply in the following situations: The recipient spouse or former spouse is a nonresident alien." I'd say there's enough cover here to go ahead and assign the loss to basis.
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