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Lets say I have a taxable brokerage account with $1k of shares for ABC. I'm reasonably sure ABC will go down over the short term but don't want to sell it so I buy puts. But since I just opened a Roth IRA with $6.5k of cash in it I decide to buy puts there to avoid short term capital gains for the hedging.

I understand this completely violates the "wash rule" and there are already questions on that. Supposing I wrote off (neglected to deduct) the capital loss in the taxable account (to comply with the wash rule) this seems like it should additionally be some kind of fraud as I can construct risk neutral positions across the two using options that favor the IRA and let market volatility "pump" contributions into the account (less brokerage fees and negligible capital gains tax in the taxable account of course.)

Maybe because it's difficult to enforce the IRS leaves this open and writes it off? Do they wait until I withdraw 50 years later and go back to correlate everything and ding me then? I feel like I'm missing something serious.

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2 Answers 2

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It feels like you are conflating issues. If your goal is to "work around the IRA contribution limit" this doesn't seem an effective way to do it. If you are asking in general if pairing 2 trades that somehow favor the one in the IRA, that's perfectly fine, but if they are based on the same stock, your note about not being able to take the loss is correct. To be clear, it may be an interesting hypothetical, but over time, a tough way to actually increase the Roth's value enough to make up for the discarded capital losses outside the IRA.

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You cannot deduct loss on a wash sale involving IRA, period. It's not something you "supposedly" do, it's just the law. So in this scenario, if your prediction is correct, you cannot deduct the capital loss in the taxable account if you create a "wash sale" condition with the puts in your IRA.

There are restrictions on what you can do with options in your IRA, and you need to make sure you comply with them. The protective puts strategy you're describing is allowed (assuming you comply with the wash-sale rules), but some others are not. See here for more details.

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  • But there aren't any other problems than just losing out on the capital loss deduction? This seems overly lenient.
    – swiley
    Aug 17, 2023 at 9:39

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