TLH time!

[NomDeER]

Thanks to everyone who weighed in on my issue. There clearly is disagreement about how the wash rules apply to a conversion. I haven't been able to find a good resource discussing this issue. I'll give Vanguard a call this week, but I'll probably just end up playing it safe and seeing how the market looks 31 days after the conversion. Potentially saving a little money on taxes just isn't worth the headaches if I get this wrong.

 

[mrfeh]

Thanks to everyone who weighed in on my issue. There clearly is disagreement about how the wash rules apply to a conversion. I haven't been able to find a good resource discussing this issue. I'll give Vanguard a call this week, but I'll probably just end up playing it safe and seeing how the market looks 31 days after the conversion. Potentially saving a little money on taxes just isn't worth the headaches if I get this wrong.

I am not an expert, but I don't see how a conversion could be considered a sale or a purchase.

 

[TheWizard]

I am not an expert, but I don't see how a conversion could be considered a sale or a purchase.

An "in-kind" conversion, you mean...

 

[cathy63]

I partially disagree.

For purposes of taxation, I agree that the FMV on the date of the conversion is included in ordinary income.

I disagree that an in-kind Roth conversion interacts with wash sale rules. However, I'm not aware of any IRS documents that say one way or the other. I asked Grok and it agreed with me, but as my Dad used to say, "That and a quarter will buy you a cup of coffee".

Perhaps @cathy63 would be willing to opine.

Since you asked, my opinion is that it doesn't matter whether an in-kind conversion meets the definition of a wash sale or not. As far as I know, the only reason to care whether a transaction is a wash sale is because you can't deduct the loss if it is. Since you can't deduct losses in either type of IRA, it doesn't matter whether any transaction taking place within or between them is a wash or not.

Note that if you sell stock at a loss in a taxable account and purchase the same thing in an IRA, then you do have a non-deductible wash sale, but in that case, it's the sale from the taxable account that is the wash sale, not any later sale that might take place within the IRA. In this case, the IRA basis does not increase and the wash sale loss just permanently disappears.

 

[NomDeER]

Since you asked, my opinion is that it doesn't matter whether an in-kind conversion meets the definition of a wash sale or not. As far as I know, the only reason to care whether a transaction is a wash sale is because you can't deduct the loss if it is. Since you can't deduct losses in either type of IRA, it doesn't matter whether any transaction taking place within or between them is a wash or not.

But, the point of this for me is that I want to sell the same thing in my taxable account at a loss. The issue is whether I have to take into account the timing of the Roth conversion when deciding whether and when to sell at a loss in my taxable account.

 

[RetiredHappy]

Only 24%? There are many on this forum that would kill to have that in their retirement mix.

Many here have posted about not having any taxable assets worth discussing. Consider our single friends here that can't take advantage of a $3K reduction on income because they have no taxable losses. That particularly stings as single filers get the SAME $3K reduction that MFJ get. And if that puts them into another IRMAA bracket ... ouch.

Or someone that needs a new roof and only has a IRA and Roth account. So, instead of selling 10K of a large winner and offsetting it with 10K of LT losses - thus getting the 10K to pay for the roof without adding a dime to their taxes (or AGI) - they need to make the decision to add to AGI from taking the money from their IRA and pay the taxes or take it from their ROTH. However, if the only reason that they have a Roth (that cost them 22% in taxes) was because their heir is in a really high tax bracket ... that becomes quite the lose-lose situation.

We have 50% of our investments in taxable accounts. But we don't have opportunities for TLH.

 

[NW-Bound]

But, the point of this for me is that I want to sell the same thing in my taxable account at a loss. The issue is whether I have to take into account the timing of the Roth conversion when deciding whether and when to sell at a loss in my taxable account

I wonder what the IRS has considered "substantially identical" in the past, so that you can buy something different than VTI in the Roth account.

VTI vs. VOO or SPY? How about VTI and DIA? These pairs both have a correlation of greater than 90%.

 

[TheWizard]

I wonder what the IRS has considered "substantially identical" in the past, so that you can buy something different than VTI in the Roth account.

VTI vs. VOO or SPY? How about VTI and DIA? These pairs both have a correlation of greater than 90%.

Correlation doesn't matter.
Some S&P 500 funds actually hold 503 stocks.
Another one holds 506 stocks.
They are not identical, go for it.

Earlier, someone suggested switching from an ETF to the MF version of the same fund. Bad move, at Vanguard anyway...

 

[audreyh1]

Since you asked, my opinion is that it doesn't matter whether an in-kind conversion meets the definition of a wash sale or not. As far as I know, the only reason to care whether a transaction is a wash sale is because you can't deduct the loss if it is. Since you can't deduct losses in either type of IRA, it doesn't matter whether any transaction taking place within or between them is a wash or not.

Note that if you sell stock at a loss in a taxable account and purchase the same thing in an IRA, then you do have a non-deductible wash sale, but in that case, it's the sale from the taxable account that is the wash sale, not any later sale that might take place within the IRA. In this case, the IRA basis does not increase and the wash sale loss just permanently disappears.

The issue is that you can’t take a loss in an IRA and the turnaround and buy the substantially identical asset within 30 days without incurring a wash sale within 30 days. Same issue if you had bought the assets within 30 days prior.

The issue is whether an asset transfer in kind from one account to another qualifies as a sell then buy. Technically transfers in kind are supposed to be non-tax events, so I don’t see why a Roth conversion in kind would not also be treated as a no tax event as there was no sale of the asset and then buying. Otherwise asset transfers in kind between taxable brokerage accounts would also be treated as taxable events as if there was a sell then buy. But that’s not how it works. It is simply a transfer of the asset with no selling, no buying, and the original basis is also transferred.

 

[NW-Bound]

I suspect that as long as the transactions do not involve the same ETF/MF symbol, the IRS does not know nor does it care. I think they are too short of man power to do much.

Here's a real story. My brother has been doing tax returns for my mother. He said last year, he underwithheld her taxes due to an unexpected MF distribution in December. She owed a small penalty, but instead of computing and paying it, he paid the additional tax and elected to have the IRS compute the penalty. Never heard from them.

I made an error in my 2024 return, overpaying the IRS more than $200. Filed an amended return. Never heard from them.

 

[SecondCor521]

Since you asked, my opinion is that it doesn't matter whether an in-kind conversion meets the definition of a wash sale or not. As far as I know, the only reason to care whether a transaction is a wash sale is because you can't deduct the loss if it is. Since you can't deduct losses in either type of IRA, it doesn't matter whether any transaction taking place within or between them is a wash or not.

Note that if you sell stock at a loss in a taxable account and purchase the same thing in an IRA, then you do have a non-deductible wash sale, but in that case, it's the sale from the taxable account that is the wash sale, not any later sale that might take place within the IRA. In this case, the IRA basis does not increase and the wash sale loss just permanently disappears.

Thanks for the reply.

The scenario I (and I think others) were wondering about is if a taxpayer sells, for example, 100 shares of VTI in their taxable account on Monday at a loss, then does a Roth conversion of 100 shares of VTI on Tuesday, can they deduct the loss on their taxable VTI shares? I think they can.

 

[TheWizard]

Thanks for the reply.

The scenario I (and I think others) were wondering about is if a taxpayer sells, for example, 100 shares of VTI in their taxable account on Monday at a loss, then does a Roth conversion of 100 shares of VTI on Tuesday, can they deduct the loss on their taxable VTI shares? I think they can.

I hope they can also.
The important point is that an IN-KIND Roth conversion was done on Tuesday. Assuming the VTI shares in the tIRA were bought more than 31 days ago, then we're just dealing with a transfer of shares from one account to another.
No replacement shares were bought within the wash sale window...

 

[EastWest Gal]

I think you can avoid a wash sale by simply buying a large growth ETF from a different brokerage house. Investopedia has a good article explaining the definition of a "substantially identical security, which I found useful. All of my stock holdings and most of my bond holdings are long enough to show a gain. Here is the article:

https://www.investopedia.com/terms/s/substantiallyidenticalsecurity.asp

 

[SecondCor521]

I hope they can also.
The important point is that an IN-KIND Roth conversion was done on Tuesday. Assuming the VTI shares in the tIRA were bought more than 31 days ago, then we're just dealing with a transfer of shares from one account to another.
No replacement shares were bought within the wash sale window...

I agree with you, but pb4uski seems to disagree -- see post #45 on this thread.

 

[cathy63]

But, the point of this for me is that I want to sell the same thing in my taxable account at a loss. The issue is whether I have to take into account the timing of the Roth conversion when deciding whether and when to sell at a loss in my taxable account.

Ah I see. I didn't read the whole thread and was just responding to SecondCor521 having tagged me. Mea culpa.

As far as I know, the IRS has made no rulings as to whether a Roth conversion in-kind is considered a sale and purchase. I just did a quick search, and didn't find anything, but it's possible I missed something. There are many tax questions like this that aren't ever going to be answered unless someone asks for an IRS private letter or a case ends up in tax court, so you can only do your best and then wait and see what happens.

When this kind of thing comes up, I try to think through the process that would have to happen in order for things to go the opposite of the way we'd want them to go and then I assess the likelihood of that happening and how much it would cost if it did, and then decide whether or not to take a risk. So in this case, here's what I think would have to happen:
- the IRS would have to figure out there might be a wash sale, they could be notified by the broker or they could do an audit that included transaction level analysis
- they would have to decide that a conversion in-kind is actually a sale and purchase behind the scenes

I have never seen a broker report a wash sale across accounts, so I'm pretty sure nothing is going to be flagged for the IRS automatically on a 1099. So then what are the odds that they audit you and look deeper than your 1099s and also decide that this was a wash sale? That type of detailed audit practically never happens to ordinary taxpayers and unless your broker actually reports a transfer as a sale/purchase on your statements, which seems unlikely, there'd be nothing to hang a wash sale determination on anyway. So this seems like an extremely low probability event to me.

But suppose the worst did happen and they claimed that the loss in your taxable account should be disallowed. You can figure out how much extra tax it would cost you (0%, 15% or 20% if it's a long term loss and there could be 3.8% NIIT as well if your AGI is over $200K single or $250K MFJ) and then multiply by about 7% interest compounded for three years to get the worst case number. Is that an amount you're willing to risk on the very small chance that things go against you?

 

[pb4uski]

I partially disagree.

For purposes of taxation, I agree that the FMV on the date of the conversion is included in ordinary income.

I disagree that an in-kind Roth conversion interacts with wash sale rules. However, I'm not aware of any IRS documents that say one way or the other. I asked Grok and it agreed with me, but as my Dad used to say, "That and a quarter will buy you a cup of coffee".

Perhaps @cathy63 would be willing to opine.

I agreed with you initially but as I wrote a response I had second thoughts so I asked Gemini and it said the loss would not be deductble.

After there was no consensus here I rephrased the query more precisely as "I own 100 shares of XYZ in my traditional IRA. I do a in-kind Roth conversion and transfer the 100 shares of XYZ from my traditional IRA to my Roth IRA. A couple days later I sell 100 shares of XYZ that I own in my taxable brokerage account at a loss. Can I claim the loss on my taxes?"

Gemini said no. It said that the loss is disallowed because under IRS Revenue Ruling 2008-5, the wash sale rule applies across your different accounts, including your Traditional and Roth IRAs... "If you sell a security at a loss and, within 30 days before or after that sale, you acquire "substantially identical" securities, the loss is disallowed" and that even though a Roth conversion is a transfer of existing shares, the IRS treats the "acquisition" of those shares in the Roth IRA as a purchase for the purpose of the wash sale rule.

I concede that I'm not convinced that makes much sense so I asked Perplexity. Perplexity initially said that I could deduct the loss but offered to "If you want, I can help you map the dates and tell you whether a wash sale likely happened." So I told Perplexity that the in-kind transfer occurred on 3/3/2025 and the sale at a loss occurred on 3/10/2025 and then Perplexity said that the loss would be disallowed because "...generally, an in-kind Roth conversion of XYZ into your Roth IRA is treated as an acquisition of substantially identical stock in the Roth IRA for wash-sale purposes, so it can trigger or affect a wash sale if you sell the same stock at a loss in taxable account within 30 days. IRS guidance and later summaries say wash sale rules can apply when the replacement purchase is in a traditional IRA or Roth IRA, and the disallowed loss is not added to Roth IRA basis."

Grok also said no. It said "Your in-kind Roth conversion transfers the 100 shares of XYZ from the traditional IRA directly into the Roth IRA. For tax purposes, this counts as the Roth IRA acquiring substantially identical securities. Even though it is an in-kind transfer (no cash purchase or sale of the shares occurs), the conversion is treated as an acquisition by your Roth IRA within the wash sale window (a couple of days before your taxable sale)."

Now all of that said, I think the risk is negligible and if one did deduct the loss I think the chances of it being challenged are remote so it depends on how much tax risk that one is willing to assume.

 

[cathy63]

Can Gemini, Grok or Perplexity give you a source for the claim that "the IRS treats the "acquisition" of those shares in the Roth IRA as a purchase for the purpose of the wash sale rule"? I would really like to see a trustworthy source for that because I looked and didn't find one. It sounds suspiciously like they all read the same 3rd-party website and are regurgitating info that may or may not be accurate, but if they did get it from the IRS itself I'd love to know where to find it.

 

[pb4uski]

Traditional IRAs chapter of Pub. 590-A (and cross-referenced in Pub. 590-B), the IRS defines a conversion as follows: "You can convert amounts from your traditional IRA to a Roth IRA... A conversion is a type of distribution."

Roth IRAs chapter, specifically in the Can You Move Amounts Into a Roth IRA? section:
"A conversion is a rollover contribution from a traditional IRA to a Roth IRA."

When you move shares from a Traditional IRA to a Roth IRA you are taking a distribution (getting the shares) and immediately making a contribution (buying into the Roth IRA). Because a contribution to a Roth IRA is an "acquisition" of shares, it satisfies the requirement of IRC § 1091, which bans claiming a loss if you "acquire (by purchase or by an exchange...)" substantially identical stock within the 61-day window.

 

[pb4uski]

The issue is that you can’t take a loss in an IRA and the turnaround and buy the substantially identical asset within 30 days without incurring a wash sale within 30 days. Same issue if you had bought the assets within 30 days prior.

The issue is whether an asset transfer in kind from one account to another qualifies as a sell then buy. Technically transfers in kind are supposed to be non-tax events, so I don’t see why a Roth conversion in kind would not also be treated as a no tax event as there was no sale of the asset and then buying. Otherwise asset transfers in kind between taxable brokerage accounts would also be treated as taxable events as if there was a sell then buy. But that’s not how it works. It is simply a transfer of the asset with no selling, no buying, and the original basis is also transferred.

Roth conversions, whether in cash or in-kind transfers, ate obviously a taxable event.

When you do an in kind transfer, the conversion amount is as if you sold the transferred shares at market value (and you pay tax on that amount assuming no basis in your traditional IRA from non-deductible IRA contributions), transferred the sale proceeds to the Roth IRA (technically a distribution from the traditional IRA that is the taxable event and a rollover contribution to the Roth IRA) and then used the contribution to the Roth IRA to acquire the shares that were sold.

When you cross between taxable accounts, tax-deferred accounts and tax-free accounts you will usually have a taxable event of some sort (with qualifying Roth withdrawals being an exception).

 

[NomDeER]

When you move shares from a Traditional IRA to a Roth IRA you are taking a distribution (getting the shares) and immediately making a contribution (buying into the Roth IRA). Because a contribution to a Roth IRA is an "acquisition" of shares, it satisfies the requirement of IRC § 1091, which bans claiming a loss if you "acquire (by purchase or by an exchange...)" substantially identical stock within the 61-day window.

Section 1091 says:

"In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under section 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business. For purposes of this section, the term 'stock or securities' shall, except as provided in regulations, include contracts or options to acquire or sell stock or securities."

Well, that is as clear as mud in the context of converting particular shares. Just because it's a "contribution" doesn't mean it is a "purchase." A purchase and a contribution are two distinct things. Of course, one can make a purchase with the money from one's contribution, but that doesn't make a contribution a purchase. I once "contributed" to an IRA simply by putting money in an IRA at a bank. I didn't "purchase" anything. And I don't see how my conversion is an "exchange on which the entire amount of gain or loss was recognized by law." In my case, I'm not exchanging shares in one fund for shares in another fund, and the amount of gain or loss is irrelevant under the law; all of it is taxed.

When I Googled whether an in kind Roth conversion was a "purchase," AI told me no. But who knows.

Of course a conversion is a taxable event, but that is a separate question from whether a conversion of particular shares is a "purchase."

 

[pb4uski]

So some think the outcome should be different if one does an in-kind transfer vs a sale of shares transfer of cash and an immediate purchase of shares at the same price? Good luck with that on audit. Economic substance trumps legal form in this case methinks.

 

[TheWizard]

A couple of things to confuse the issue further:
First, the IRS has no knowledge of WHEN you did a Roth conversion during the year, unless they do an audit and follow the paper trail.

Second, no one has replied to report how Vanguard (or other custodian) handles the DATE ACQUIRED field for the in-kind converted lot in the Roth IRA. If they retain the same date as the lot in the tIRA from which the conversion came, then I don't see a problem. If they put the date of the conversion in DATE ACQUIRED, then I see a problem.

I suspect the IRS tends to rely on custodians to report wash sales most of the time.

If was going to say I would try an in-kind conversion of one share of an ETF this afternoon to see what happens, but I've not completed my RMD/QCD for the year from my tIRA, so I'm not doing that...

 

[junkanoo]

I’m nowhere near to having any losses to harvest.

Owning ETFs in a long bull market will do that.

 

[junkanoo]

Count me among those who have only a small percentage of taxable accounts in their stash. I just added them all up, and the total is 5.6%, even though it still a few hundred Ks. I used to have a lot more in taxable, but the years of ER prior to 59-1/2 have drained them. Sometime, I thought it would be nice to have more taxable to enjoy the tax-free long-term capital gain for non-earned income up to more than $100K/year as I did back then in early ER. But then, I remember that my situation now is quite different.

I will face RMD soon and that along with SS which I can delay no longer will put me permanently into the 24% bracket. The only way out of it is if the market gets decimated, and I would not want that. So, might as well pay the tax now to do aggressive Roth conversion to get it over with. And having done that for a few years, we now have Roth accounts in the 7 figures, and that's still a fraction of the remaining IRA/401k to be converted.

And the tax-free Roth accounts allow me to take advantage of the market movements more freely without having to think about the tax ramifications. I remember in the long past, how often I was reluctant to book a stock gain even though I felt it was topping out, all because of the thought of the short-term cap gain tax liability cutting into the profit. And I held on, until there was no longer a gain but a loss.

No, my situation is now completely different. And I act accordingly. The return of my Roth has been greater than the gain in my tax-deferred accounts, which is higher than the gain in my taxable, because I have been paying more attention to the Roth while the taxable is buy-and-hold. And buy-and-hold over so many years mean no loss anywhere to do tax loss harvesting.

Interesting post. *Most* posters on this site would have a lower return in their tax-deferred account than taxable as that is where they hold their bonds.

"I will face RMD soon and that along with SS which I can delay no longer will put me permanently into the 24% bracket."

Those RMDs could be offset by QCDs which *could* solve that problem. Others might prefer to do only a modest amount of QCDs .... getting them out of IRMMA jail. Each to his/her own.