Taxes on Capital Gains

[Hopeful]

So I have many of the same index funds (such as Vanguard Total Stock Market) held in both taxable accounts and tax deferred retirement accounts. I was out of curiosity looking into was sale rules. To the best of the information I could find on the internet said that wash sale rules would apply across tax deferred and taxable accounts. Meaning I could claim a loss in a taxable account, then buy the stock within an IRA right away within 30 days.

This got me thinking about cost basis across taxable and tax deferred accounts. I never really paid much attention to the like stock/fund in and IRA when selling a fund in a taxable account when figuring basis. If using average cost method, does the IRS expect you to also factor in the average cost of the tax deferred shared too? My gut tells me no, but the wash sale rule kind of surprised me.

[freedomatlast]

My understanding is that cost basis is calculated for each account and not calculated for combined accounts.

[kaneohe]

Quote:

Originally Posted by Hopeful . To the best of the information I could find on the internet said that wash sale rules would apply across tax deferred and taxable accounts. Meaning I could claim a loss in a taxable account, then buy the stock within an IRA right away within 30 days. .

I don't think that is the right conclusion. If your tax deferred and taxable accounts were considered "one" for the purposes of the wash sale (applies across both), you could not make the conclusion in the last quoted sentence above

[Hopeful]

Quote:

Originally Posted by kaneohe I don't think that is the right conclusion. If your tax deferred and taxable accounts were considered "one" for the purposes of the wash sale (applies across both), you could not make the conclusion in the last quoted sentence above

My apologies for the confusion. You are right, I meant to type:

"Meaning I couldn't claim a loss in a taxable account, then buy the stock within an IRA right away within 30 days."

[pb4uski]

I think you would just lose the loss in your taxable account if you sell a stock in your taxable account at a loss and then buy a similar security in your tax deferred account within the window.

Usually the wash sale results in denial of the loss and a basis adjustment of the acquired similar security. I suspect that technically it would result in an increase in the basis of your IRA (so a portion of your future distributions are not taxable, like in a mixed basis deductible/non-deductible IRA).

Your question gave me an interesting thought though. Let's say you sell Total Stock at a loss and simultaneously (or within 30 days) buy 65% S&P 500 and 35% Extended Market Index (which in combination are the same as Total Stock). Neither S&P 500 nor Extended Market Index are substantially similar to Total Stock, but in combination they are so is it a wash sale or not?

[Neill]

You want to avoid a wash sale to a retirement account.
The IRS got a favorable ruling on this a few years ago.
You lose the loss and the basis in your IRA etc is not changed. It's very bad.

[Hopeful]

Not really trying to avoid a wash sale. I could see how this would be tricky though if I did have losses on the taxable side. Say you sold total stock index at a loss in taxable, but you have bi-weekly automatic purchases in a 401k/403b.

My question more pertains to calculation of cost basis. I just want to verify that I am right in calculating the basis when selling in taxable, only using the basis of the shares in the taxable account. I own many similar index funds in Roth, 403b, and taxable.

[Neill]

Quote:

Originally Posted by Hopeful Not really trying to avoid a wash sale. I could see how this would be tricky though if I did have losses on the taxable side. Say you sold total stock index at a loss in taxable, but you have bi-weekly automatic purchases in a 401k/403b. My question more pertains to calculation of cost basis. I just want to verify that I am right in calculating the basis when selling in taxable, only using the basis of the shares in the taxable account. I own many similar index funds in Roth, 403b, and taxable.

When you sell you have to nominate the lots or take the first in first out rule. If your selling the shares in a taxable account you can only be selling the tax lots in that account. So ignore the retirement account.
I would suggest choosing your lots. Gives you a lot of scope for tax reduction. This is one reason the government keeps wanting to take away the option.

[FIRE'd@51]

Quote:

Originally Posted by pb4uski I suspect that technically it would result in an increase in the basis of your IRA (so a portion of your future distributions are not taxable, like in a mixed basis deductible/non-deductible IRA).

I don't think you meant this the way you wrote the sentence. There is no basis in a tax-deferred IRA since the distributions are all ordinary income.

[Neill]

Quote:

Originally Posted by FIRE'd@51 I don't think you meant this the way you wrote the sentence. There is no basis in a tax-deferred IRA since the distributions are all ordinary income.

This is not true. You track the basis (generated by non-deductible IRA contributions) on form 8606. Did I imagine the form?

[FIRE'd@51]

Quote:

Originally Posted by Neill This is not true. You track the basis (generated by non-deductible IRA contributions) on form 8606. Did I imagine the form?

No, you didn't imagine Form 8606.

Perhaps we're getting deep into semantics here. I was referring to a totally tax-deferred IRA (with no non-deductible contributions), which is what I thought OP was referring to. I read pb4uski's sentence to leave open the possibility that OP could apply the basis rule to a totally tax-deferred IRA in the same way one would with a mixed IRA.

[LOL!]

At this point in time, one should have practically no losses to harvest in their taxable accounts anyways. And I advocate harvesting all losses before they become long-term losses or before the new year rolls around. So I think this is all much ado about nothing.

One needs to be aware of the rules, but they are so trivial to get around that one should not worry about them.

But if you like to worry, one should read the Betterment white paper on tax-loss harvesting to see how they tried to program TLH into their services and explicitly discuss the interplay of taxable and tax-advantaged accounts:
https://www.betterment.com/resources...g-white-paper/

[Neill]

Quote:

Originally Posted by FIRE'd@51 No, you didn't imagine Form 8606. Perhaps we're getting deep into semantics here. I was referring to a totally tax-deferred IRA (with no non-deductible contributions), which is what I thought OP was referring to. I read pb4uski's sentence to leave open the possibility that OP could apply the basis rule to a totally tax-deferred IRA in the same way one would with a mixed IRA.

Then I would use the term 'Roth IRA'. Even the Roth IRA has basis though tracked I think with the same form. The basis affects some of the early withdraw penalties. I don't know this area very well as I don't plan to pay any penalties :-).

[pb4uski]

Quote:

Originally Posted by FIRE'd@51 No, you didn't imagine Form 8606. Perhaps we're getting deep into semantics here. I was referring to a totally tax-deferred IRA (with no non-deductible contributions), which is what I thought OP was referring to. I read pb4uski's sentence to leave open the possibility that OP could apply the basis rule to a totally tax-deferred IRA in the same way one would with a mixed IRA.

Yes, I was suggesting that if the loss was deferred and resulted in an adjustment of basis that it might provide some basis to a tIRA which would normally have zero basis.

IOW, the benefit if the taxable account loss that was deferred ends up effectively transferred to the tIRA and the taxpayer would get the deferred benefit later in that a portion of distributions would be basis rather than ordinary income.

If the substantially similar security were purchased in a taxable account then the deferral of the wash sale loss would result in an increase in the similar security. On parallel, if the substantially similar security is purchased in the tIRA, then the loss is deferred and the purchase security/tIRA gets basis equal to the loss.

That was my thinking anyway. IOW, like the wash sale in the taxable account, the taxpayer gets the benefit of the loss when the substantial similar security is sold in an increased basis the taxpayer gets the benefit of the loss when the income would have been recognized if the wash sale loss is transferred to the tIRA.

[Neill]

Quote:

Originally Posted by pb4uski Yes, I was suggesting that if the loss was deferred and resulted in an adjustment of basis that it might provide some basis to a tIRA which would normally have zero basis. IOW, the benefit if the taxable account loss that was deferred ends up effectively transferred to the tIRA and the taxpayer would get the deferred benefit later in that a portion of distributions would be basis rather than ordinary income. If the substantially similar security were purchased in a taxable account then the deferral of the wash sale loss would result in an increase in the similar security. On parallel, if the substantially similar security is purchased in the tIRA, then the loss is deferred and the purchase security/tIRA gets basis equal to the loss. That was my thinking anyway. IOW, like the wash sale in the taxable account, the taxpayer gets the benefit of the loss when the substantial similar security is sold in an increased basis the taxpayer gets the benefit of the loss when the income would have been recognized if the wash sale loss is transferred to the tIRA.

The IRS has a ruling on this saying you lose the loss and you don't get a basis adjustment. See here:

Wash Sales and IRAs

[pb4uski]

Quote:

Originally Posted by Neill The IRS has a ruling on this saying you lose the loss and you don't get a basis adjustment. See here: Wash Sales and IRAs

Thanks. Good to know. Doesn't totally make sense and it might not hold up if it were challenged in tax court, but I suspect they wanted to make the consequences unpalatable.

[Neill]

Quote:

Originally Posted by pb4uski Thanks. Good to know. Doesn't totally make sense and it might not hold up if it were challenged in tax court, but I suspect they wanted to make the consequences unpalatable.

It's been to court. Read the ruling. They are using cases from the 1930's with wash sales to trusts.
You can also get wash sales to your spouse for example. So any account you have a financial interest in I would guess.

[pb4uski]

Quote:

Originally Posted by Neill It's been to court. Read the ruling. They are using cases from the 1930's with wash sales to trusts. You can also get wash sales to your spouse for example. So any account you have a financial interest in I would guess.

You're confusing two separate issues in the ruling. First is whether the loss on the sale in the taxable account is deductible. It is not and the IRS used the Security First case from 1933 which as some good parallels to the subject transaction in explaining its position in the revenue ruling that the loss is not deductible. They have a strong case by comparison to the Security First case.

The second issue, is whether the deferred loss results in an adjustment of the basis of the IRA. While the IRS view in the revenue ruling is clear, my view is that they would be on shaky ground if that specific issue ever went to tax court (and it has not yet been to court).