Most securities are sold through the market. But if you sell a stock or bond (perhaps from a privately held corporation) directly to a person who is considered a related party, no loss deduction is allowed. A related party for purposes of the capital loss restriction includes most close relatives, such as a spouse, child, grandchild, great-grandchild, parent, grandparent, great-grandparent, or sibling. It doesn’t include other relatives, no matter how close you feel to them, such as in-laws, aunts and uncles, or nieces and nephews.
The capital loss restriction cannot be avoided by selling to a person not in the related-party list if that person is acting as a nominee of a related person. For instance, if you sell shares at a loss to a brother-in-law who is acting as the nominee of your sister, you can’t recognize your loss.
The rule that restricts your ability to report a loss on a sale to a related party isn’t limited to sales to your relatives. It also applies to sales to a related corporation (one in which you own more than 50% of the value of the stock) and certain other controlled entities, such as trusts and estates.
The disallowed loss can be salvaged if the related party then sells the security at a profit. The portion of the gain that reflects your loss is not taxed to the related party. Of course, you don’t benefit from the disallowed loss; you can’t deduct the loss when the related party sells the asset at a gain.
At the end of 2004 (the most recent year for statistics), 51 million taxpayers had IRAs with assets totaling $3.3 trillion.
Source: Spring Statistics of Income BulletinView all factoids