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IRS Issues Ruling That Wash Sale Loss Deferral Rule Applies if Substantially Identical Stock Is Purchased in Taxpayer's Individual Retirement Account

December 21, 2007

On December 20th, 2007, the Internal Revenue Service issued Revenue Ruling 2008-5. Rev. Rul. 2008-5 concludes that if a taxpayer sells a stock at a loss and then purchases substantially identical stock in his or her individual retirement account (IRA or Roth IRA) within the period beginning 30 days before the sale date and ending 30 days after, the wash sale rule of Internal Revenue Code Section 1091 disallows the loss. Unlike a normal wash sale (where the basis and holding period of the acquired stock triggering the wash sale would be adjusted to account for the loss deferral), the ruling provides that there is no offsetting basis adjustment in the IRA. This ruling applies even though the sale and purchase of stock is executed with different dealers/market participants.

In reaching this conclusion, the IRS relies on a tax principle and case law that focuses on the taxpayer's actual command and control of property acquired by the IRA trust, even though the IRA trust is actually legally distinct and separate from the taxpayer. The IRS ruling is narrow and does not address related issues including specifically whether such a wash sale transaction is a prohibited transaction relating to the IRA that could be subject to additional tax under Code Sec. 4975. Also, the ruling does not include a prospective effective date and therefore the IRS would likely take the position that the ruling applies both retroactively and going forward.


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