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Consider the following scenario:

Stock A pays a large annual, non-qualified dividend. Stock B pays a monthly non-qualified dividend. I hold stock A in a taxable account and an equivalent $ amount of stock B in a Roth IRA.

I want to minimize the amount of tax I pay on the dividends I receive. The ex- date of stock A's dividend is approaching. Can I sell my shares of both stocks and simultaneously buy them in the other account, so that I receive stock A's large annual dividend tax-free? And then can I, immediately after receiving the dividend of stock A, swap them back so that I receive stock B's dividend tax-free throughout the rest of the year? Would the IRS frown on this?

(Stock A has lost value since I purchased it, so capital gains taxes are not an issue.)

  • @DStanley - The question specifies a Roth IRA, which is tax-free. – Rick Goldstein Jul 24 '18 at 14:34
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    Not sure what the taxable account has to do with anything in this question. If you're not moving money in and out of the accounts, these transactions are entirely independent. Within the Roth, you can trade however you like. If you don't want to pay taxes on dividends in your taxable account, don't hold dividend-paying stocks there. – Rick Goldstein Jul 24 '18 at 14:38
  • I'm essentially wanting to engage in a wash sale between a taxable and non-taxable account, so that I can receive the dividends in the non-taxable account. Then I want to do another wash sale, immediately after receiving the dividends, to put stock A back in my taxable account. The transactions are in theory independent, but the tax rules oftentimes aren't so cut-and-dry. E.g. I can't sell a stock in a taxable account and claim a loss on it if I immediately purchase the same stock in an IRA. – user278411 Jul 24 '18 at 15:06
  • Selling stock A creates a wash sale when you buy it in the IRA. Not a good idea. – JTP - Apologise to Monica Jul 24 '18 at 16:07
  • What's the point of doing the exchange in the taxable account? I think that's not clear from the question, and is why I wouldn't say this makes sense. – Joe Jul 24 '18 at 17:19
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I'm not sure it matters if you can do it, because it would be pointless even if you could. On average, stock prices drop by the price of the dividend once the dividend date has passed. So when you swap it back the value has changed and you end up pretty much exactly where you started, minus the fees for the trades. What you propose might make sense if you could somehow hold the price fixed before and after the dividend, but alas, you can't.

Regarding tax rates, your proposal would effectively have your taxable account purchasing stock at the ex-div rate and selling at the higher pre-div rate, (potentially) realizing capital gains each year prior to the swap. So, you can't avoid the tax, but there may be a possible benefit if the capital gains rate is lower than your ordinary dividends rate. But, you can accomplish this identical scenario without moving it into a tax advantaged account (which has no benefit as described in the previous paragraph.) You could theoretically just sell from the taxable account right before the div date and rebuy immediately after and accomplish the same thing without the "transfer".

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    Dividends are taxable in a regular brokerage account, I suspect this person is trying to avoid that tax. – quid Jul 24 '18 at 17:09
  • The stock exchanges reduce share price drops by exactly the amount of the dividend on the ex-dividend date. And yes, it is pointless because either stock may open higher or lower on the ex-div date. – Bob Baerker Jul 24 '18 at 17:27
  • @quid - agreed, but it's still pointless and I updated as to why. – TTT Jul 24 '18 at 18:16
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    Right thanks for clearing this up... I knew something seemed too good to be true about this plan. – user278411 Jul 24 '18 at 18:44
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What you do in one account is irrelevant to the tax treatment of other. We can largely treat the two sets of transactions separately. If you sell Stock A and then quickly buying it back within 30 days, it's known as a "wash sale". You won't be able to claim any losses from the sale (although the losses will be part of the cost basis), but as far as I know, you can use this tactic to effectively use part of the loss to offset the dividend payment. This will reset the clock as far as "long-term capital gains", however.

So for instance, suppose you buy a stock for $30, and it's now worth $28. It distributes $1 in dividends, and the stock price immediately goes down to $27 (dividends aren't free money; they come out of the stock price). Several years later, you sell it for $40.

Scenario 1: You hold onto the stock the whole time. You pay tax on the $1 dividend immediately, and then when you sell it for $40, you have a $30 tax basis, so you have to pay tax on the $10 profit.

Scenario 2: You sell just before the distribution, and buy right after. You now have a tax basis of $29 (you have a cost basis of $27 from buying it at $27, but your earlier $2 loss is also added to the cost basis). When you sell the stock for $40, you have to pay tax on the $11 difference.

So in both cases, the $1 dividends is eventually taxable income, it's just a question of when. If you think you'll have a lower tax rate in the future, or it would currently be short-term capital gains but would be long-term gains later, or you think the stock won't ever recover (and you don't think you will ever have a capital gain that you can offset with this loss), then this plan may have value. You should consult a professional, however.

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    What you do in one account is irrelevant to the tax treatment of other. that's not true. Wash sales are a tax issue and absolutely consider all holdings in all accounts. – quid Jul 24 '18 at 17:25
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A wash sale violation (taxable account) occurs if you take a substantially similar position in a stock (or option) within a 60 day window of having realized a loss. This window includes 30 days before and 30 days after the loss date. This means that you must increase the cost basis of the second purchase by the amount of the loss and the claim of loss is deferred. When you close the second position cleanly you get to deduct the original loss - cleanly, meaning that there have been no additional WS trades in this security.

A wash sale violation is only a problem if the loss is an end of year carryover loss (the second position was not closed during the year of the loss). If so, then the loss cannot be deducted for the year it was incurred but will be allowed in a subsequent year.

When you apply this to your proposed swap of stock A and stock B, there's no problem as long as you aren't creating a wash sale violation in the taxable account from the swap.

Then, there are execution issues and fees. Apart from the multiple commissions and B/A slippage, this can't be done effectively because you can't transact at closing prices. You don't know where each stock will open on the ex-div date after share price reduction by the stock exchange. That may be in your favor. It might not.

For additional info and some examples:

https://www.investopedia.com/articles/retirement/09/ira-wash-sale-rule.asp

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The IRS requires that IRA contributions are made in cash.

Publication 950a

Individual Retirement Accounts

  • Contributions, except for rollover contributions, must be in cash. See Rollovers , later.
  • That's not what they're suggesting doing - there's no 'contribution'. – Joe Jul 24 '18 at 17:16
  • @Joe Can I place a stock in an IRA temporarily to capture a dividend, then move it back? – quid Jul 24 '18 at 17:21
  • @quid - OP has created a convoluted scenario, looking to buy a stock within the IRA to capture the dividend. No shifting same shares in/out, but "moving" by buying/selling out of taxable account, into the IRA. A lot of effort and 4 commissions later, a lost chance to take a capital loss. – JTP - Apologise to Monica Jul 24 '18 at 17:34
  • Is that a lost chance to take a capital loss or a deferral of the loss? – Bob Baerker Jul 24 '18 at 17:53

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