Recently I have become more active in harvesting capital losses. I used up most of my capital losses left over from 2008-9 and have been looking for losses which I can realize to offset options premiums which I receive on an ongoing basis and which would be taxed as STCG.
So far, for the loss harvesting I have focussed first on Canroys since they have gone down a lot and there are no tax complications associated with selling. My usual approach is to double my position, wait 31 days to avoid a wash sale and then sell the original position.
In most cases I will not do the sale with MLPs because if I have collected significant distributions there is a large tax impact to selling. And anyway most of my MLPs have pretty good gains so there are not many good candidates for tax loss selling.
But CEP is one that fits the bill. I have held since pre-crash but collected less than $1,000 in distributions before they suspended. So recapture will be minimal. Also I have pretty good capital loss.
Furthermore, each year there have been taxes paid on partnership income which will further increase my basis and give me an even larger loss.
So how to go about it? I could of course just sell all and move on. But I don't mind keeping my small exposure as a bit of a speculation on them being able to expand oil production.
In addition to the wash sale rule, I'm not sure but I think I may have to have zero units at year end so that the K-1 will be a 'final' K-1. Or is that only necessary in order to free up passive losses, of which there are none with CEP since we have been paying tax each year?
For the same reason, I think I can't use my usual approach of double up first then sell the original, as I will never have done a complete disposition of my partnership stake. So I'm thinking I'd have to sell all units in mid Decmeber, then rebuy in mid January. That would give me a complete disposition on the K-1 and would also avoid a wash sale.
I think that approach would definitely work, but wondering whether that is the only way I can do it.
Specifically, what would happen if I use my usual strategy of double up and then sell 31 days later?
Would that still work since I am not in a position of needing to free up passive deferred losses?
There is no direct authority for an answer to your question but I think your approach works. You make a nice point about selling in December and buying in January (more than 31 days later) to make the K-1s consistent with a complete disposition, but I don’t think that’s necessary. Literally under the law, as long as you are out of the MLP for 31 days (and have no arrangement to buy back in, like buying some calls in the 31 days), I think the loss is deductible.
First, all we have is the law, which was enacted 25 years ago. The IRS has reserved the regulation on complete dispositions (meaning they haven’t come out with regs yet on the subject). The law talks about "If during the taxable year a taxpayer disposes of his entire interest in any passive activity" and then goes on to add requirements that the disposition must be a fully taxable event (where all gain or loss is recognized), and the disposition can’t be to a related party. And that’s it. There are some IRS documents that cover dispositions, but nothing in the context of an MLP where you might sell and then re-buy units. There is also a specific section of the law which says in the PTP context, you need to sell all of your units to get a complete disposition, but again, no regs yet.
So I think it’s just a matter of being reasonable. Wash sales are out because loss is not recognized. As you suggested, I think the usual way to avoid wash sale treatment (doubling up for 31 days and then selling half) also does not work in the passive loss area because at no time would you be disposing of your entire interest in the MLP.
I had this issue inadvertently 2 years ago – I sold an MLP with a loss carryover early in the year, and then much later in the same year re-bought some units in the MLP. In my case, the sale was in my account and the re-buy was in my wife’s account, so my K-1 was checked as final. So I didn’t have the cosmetic problem of not having a final K-1. But I thought about it a lot at the time, and concluded that as long as you avoided the wash sale rule, and were out of the MLP completely for 31 days, it was reasonable to deduct the accumulated losses.
Sorry I can’t give you any authority. It’s one of many areas of the law that are pretty much specific to MLPs, and the IRS just doesn't seem concerned.
Liza, I am hardly an accountant, but I will tell you the following (based on my expirience): never base your buying and selling on tax. if you do not believe in your position then you should sell and the other way applies.
Anyway, sorry for being simplistic.
Well this isn't really a buy or sell decision.
I want to keep my position but turn unrealized losses into realized losses and at the same time reset by basis lower.
That is straightforward with c-corp: either sell then rebuy 31 days later, or double up then sell the original 31 days later.
With MLPs it's not quite so simple.