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Strategies & Market Trends : Income Taxes and Record Keeping ( tax ) -- Ignore unavailable to you. Want to Upgrade?

To: Ira Player who wrote (2240)	7/3/1999 12:43:00 PM
From: Kaye Thomas	Respond to of 5810

On the issue of when the related party rule would apply to transactions on the open market, I don't think there's enough authority to make it possible to draw definitive lines. In at least one case, though, it would seem that separating the sale and the purchase by a few days wouldn't necessarily defeat the IRS argument. I believe the court interpreted idea of "prearrangement" in this situation simply to mean that the seller knew, at the time of the sale, that a replacement purchase would be made, either because the seller controlled the related party (as in the case of an IRA) or had an agreement with the related party (as in the case of a spouse who buys replacement property). We're talking about case law here, not statute or regulations, so it's difficult to be precise about where the lines are drawn. I think you would have a good argument, for example, if you and your spouse are both active traders and you could show it was merely coincidence that your spouse bought XYZ about the same time you sold it at a loss. (Imagine where both traders have a system they follow and the purchase and sale are consistent with their trading in that system.) On the issue of symmetry, I doubt that a court or the IRS would buy it because the tax positions of the two parties (the IRS and the individual) are not symmetrical, in that one pays tax and the other doesn't. The basis adjustment is designed to preserve a loss that would have been deductible were it not for the wash sale or related party rule, and in the case of a sale by an IRA there never would have been a deduction in any case. You've made an astute observation, though, that the risk here is paying the tax you would have paid in any event (plus interest and any applicable penalties), rather than the more painful risk of giving up basis that could have produced a deductible loss. Now I'll go out on a limb with a comment about investing and trading and invite the scathing criticism of those who know better. I think most people who do back flips to work around the wash sale rule are kidding themselves. They're so worried about being out of the stock for 31 days because they can't admit they made a mistake when they bought it. If you looked at the situation objectively, there's no reason they can't simply sell and invest in something else for 31 days. They could come out behind, but it's equally likely they'll come out ahead. In most cases the best way to deal with the wash sale rule is to face up to your emotional attachment to that particular stock, and get over it. Kaye Thomas, author Fairmark Press Tax Guide for Investors fairmark.com