When wash sale rule kicks in, then the capital loss is simply postponed by increasing cost basis to the later transaction where you again purchased similar replacement stock either 30 days before closing the first transaction or 30 days after closing the first transaction. Also, the wash sale rule can be triggered when you trade the same stock in pre-tax IRA and typical post-tax brokerage account.
So here are all the possible scenarios, where assumption is that replacement stock was bought within 30 days (Initial purchase -> Replacement purchase). How, each of these 16 cases would be taxed?
IRA->IRA
- Sold stock in IRA at loss, then repurchased stock in IRA and sold with loss
- Sold stock in IRA at loss, then repurchased stock in IRA and sold with gain
- Sold stock in IRA at gain, then repurchased stock in IRA and sold with loss
- Sold stock in IRA at gain, then repurchased stock in IRA and sold with gain
IRA->Brokerage
- Sold stock in IRA at loss, then repurchased stock in Brokerage and sold with loss
- Sold stock in IRA at loss, then repurchased stock in Brokerage and sold with gain
- Sold stock in IRA at gain, then repurchased stock in Brokerage and sold with loss
- Sold stock in IRA at gain, then repurchased stock in Brokerage and sold with gain
Brokerage->IRA
- Sold stock in Brokerage at loss, then repurchased stock in IRA and sold with loss
- Sold stock in Brokerage at loss, then repurchased stock in IRA and sold with gain
- Sold stock in Brokerage at gain, then repurchased stock in IRA and sold with loss
- Sold stock in Brokerage at gain, then repurchased stock in IRA and sold with gain
Brokerage->Brokerage
- Sold stock in Brokerage at loss, then repurchased stock in Brokerage and sold with loss
- Sold stock in Brokerage at loss, then repurchased stock in Brokerage and sold with gain
- Sold stock in Brokerage at gain, then repurchased stock in Brokerage and sold with loss
- Sold stock in Brokerage at gain, then repurchased stock in Brokerage and sold with gain
Here is my understanding which may be wrong:
- in cases 1,2,3,4 wash sale rule should not matter at all because both transactions were made in pre-tax IRA account anyway. Right?
- in cases 4,8,12,16 wash sale rule should not matter because both transactions were with with gain. Right?
However, I am confused about:
- cases 5,6 because can I really use loss from my IRA account to increase cost basis for transactions made in my Brokerage account? If so, then this sounds like a nice tax loophole where pre-tax loss could be used to offset post-tax gain.
- cases 9,10, because do I really have to pointlessly increase cost basis for IRA transaction and give up my rights to keep capital loss in my brokerage accou t? If so, then this sounds like a "tax trap" that should be avoided at all costs.
- in cases 3,7,11,15 wash sale rule does not matter, because first transaction was with gain and the second transaction will remain as-is without requiring cost basis recalculation. Right?
- in cases 13,14 any capital loss really would not be lost, but simply postponed to the second transaction. Typically this should not matter unless you were planning to claim loss in particular Tax year when first transaction was closed, but could not because capital loss was moved to next Tax year.