I understand the general principles of wash sales, as described here. My question is about whether a wash sale in which the investor is going to book a capital gain but for reasons that are advantageous to the investor from a tax perspective are allowed.
The scenario I’m thinking of is in the case of MLPs. MLP distributions (essentially dividends) are treated as return of capital and not directly taxed, but they do lower the cost basis of the shares (actually called “units” but no difference for our purposes). But when the cost basis hits zero, then the distributions become taxable.
So consider a scenario where the investor has or is carrying a capital loss from other investments and has an MLP whose cost basis hits zero. It could be advantageous for this investor to sell and repurchase the shares in a wash sale. Because while there will be a capital gain, this capital gain will not be taxed since it will be offset by the capital losses from the other investments. Meanwhile, the objective is to reset the cost basis for the shares at the current price and maintain the non-taxability of the distributions. Assuming that the distributions are more than the $3K allowed capital loss offset, this can* be profitable.
Essentially, the question is whether the IRS considers wash sales to be tax dodges and disallows all tax advantages that result from wash sales, or if it just specifically disallowed creating capital losses from wash sales.
[*There are other factors involved in selling MLP shares, including loss of prior deductions and deferrals, balanced by the recapture of prior passive losses, but I’m simplifying for clarity.]
My understanding is the regulations don’t care whit one about your reasons.
If you sell and then re-buy within 60 days substantially the same security, then it is a wash sale, period, amen. Nothing else matters.
Under the new basis reporting regulations your broker will report all qualifying events as wash sales no matter your intent. So you’re sort of stuck reporting them to the IRS the same way the brokerage reported them to you.
I used to do active trading and often ended up with wash sales that I didn’t think were such since I was just chasing entry and exit points and the re-buy had nothing to do with recreating the old position I had sold earlier. So I often didn’t report them as wash sales, just as two unrelated round-trip trades.
That all went out when the basis reporting came in and I found the brokerage was deeming them wash sales with no opportunity for me to say otherwise.
I understand that it’s a wash sale, but the rules on wash sales are that they don’t count as sales if the price is lower but do count if the price is higher. Meaning, if you sell a stock at a gain and immediately repurchase it, you can’t claim that the sale doesn’t count and you should not pay capital gains - you need to pay on that sale. So my question is what about sales that are at a loss but which cause you to gain.
It was not a request for advice, and in fact I’m not in the situation described at this time and don’t know anyone who is.
Not to quibble with a moderator decision :eek:, but I would note to posters that I’m specifically not asking for any sort of advice, beyond the specific answer to the question I asked.
While I’m not an expert, my understanding is that a wash sale only applies to a security sold for a loss, then repurchased within 30 days. Selling a security at a GAIN, then repurchased again within 30 days does NOT qualify as a wash sale.
I have actually done this several times. When I’ve had a large loss that I couldn’t deduct all in one year (because it was greater than $3000), I would sell some stocks at a gain (then immediately repurchase) and use the loss to “cover” those gains. Then I didn’t have to carry forward that loss. Additionally, I “stepped up” the cost basis for the stocks I sold and repurchased.