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Friday, October 08, 2010


On May 6, the stock market fell victim to the “flash crash.” In a short period of time, the market took a major dive, and then quickly recovered. Experts are still looking for what triggered the unusual movement.

Many taxpayers who had standing stop-loss orders on their securities had their securities sold for a gain or loss due to the large percentage swing that occurred.

Under the wash sale rules, those taxpayers who repurchased the same securities within 30 days cannot deduct any losses from such sales – instead, the losses will be figured into their basis on the subsequent sale of the securities.

Essentially arguing that since losses from the flash crash are deferred, some taxpayers sought a special dispensation from the IRS Commissioner that in regard to securities that were sold for a gain, the taxpayers would be allowed to repurchase their sold securities and avoid having to recognize their gains.

Not surprisingly, the Commissioner declined, per their being no authority in the Internal Revenue Code for such a deferral. Beyond the lack of specific authority, additionally there is no constitutional or statutory requirement that gains and losses be treated in the same manner under law. Indeed, the Code is rife with provisions that limit the use of losses (e.g, the $3,000 capital loss limitation, passive loss limitations, etc.) that have no corollary deferral of gain. The Code is not the place to go looking for fair and balanced provisions that impact the taxpayers and the government in equal measure.

Information Letter 2010-0188

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