Questionable securities transaction

April 23, 2009 2:37 PM

Is the following securities transaction illegal?

Suppose you have two accounts in which you hold shares of stock. Account 1 is a regular brokerage account. Account 2 is a retirement account.

Account 1 holds 1000 shares of XYZ. You'd like to transfer the shares to Account 2. So, either pre-market or after hours, you place a sell order in Account 1 for 1000 shares of XYZ with a particular limit price. Simultaneously, you place a buy order in Account 2 for 1000 shares of XYZ with the same limit price.

If XYZ is not highly traded during pre-market or after hours, and if you do it right, the shares should transfer to Account 2 and the money should transfer to Account 1, minus commissions.

Obviously, you're not a lawyer. But do you see anything illegal or otherwise problematic with this transaction? It seems like there may be stock price manipluation issues, as well as tax evasion, but I'm not sure.

posted by anonymous to work & money (13 comments total)

in the US it may be seen as a wash sale so you'll have to pay capital gains on the sale. I am no expert in the area but I know enough to say the phrase 'wash sale".
posted by GuyZero at 2:52 PM on April 23

I don't really understand what you're trying to accomplish here, and you're anonymous so you can't (easily) respond. If you just want to move the shares into the retirement account, you can transfer them directly without selling/repurchasing them, subject to annual contribution limits, if applicable. Are you trying to avoid paying capital gains on the sale from Account 1? Trying to contribute more to the retirement account than you're allowed? I don't see how this would help you in any way.
posted by zachlipton at 3:07 PM on April 23

I'm scratching my head trying to figure out what your goal is. If you want to end up with cash in Account 1 and shares in Account 2, then the trades you describe could be done at any time, with any counterparty. That is, from the scenario you've described, there's no reason to be trading after-hours with yourself. Plus there's no real transfer of wealth from one account to the other.

This would be different if you intend to trade at a non-market price, which I could see as a potential tax avoidance scheme. For example, if you had shares that normally trade for $20, and you could attempt to structure the transaction so the trade would take place at $1. This would then be an effective transfer from Account 1 to Account 2, since the shares are actually worth $20. Perhaps you think you could then report a lower capital gain, or avoid a distribution penalty from a retirement account.

If this is your plan, I can't answer the legality question since IANAL. (But my assumption would be that you would be screwed if the IRS found out.). I think there's another problem though: assuming you're trading through a broker, there will be no guarantee that your trade will be executed with yourself. There's always a chance that someone else could enter the transaction and buy the shares at $1, in which case you just sold shares worth $20 for $1 and lost a bundle.
posted by blue mustard at 3:21 PM on April 23

Ok I don't feel there is enough information here to answer precisely, but let's take a pass.

There are two distinct events going on - the sale and purchase. They aren't linked, except to you.

Selling shares in your taxable account is a taxable event, which may or may not attract tax (selling price minus purchase price). Note the tax may be capital gains or loss, and therefore this sale results in a transfer or deduction of money (wealth) to your taxable account.

Purchasing shares in your taxfree (i.e., retirement) account is a distinct event. You must use funds already in the tax free account, funds that have already been sheltered, to purchase your shares. This is a distinct event.

If you sell shares to fund this account, the sale, as originally mentioned, will trigger what's called a taxable event. These funds, net of tax, could of course be used to fund a transaction in your tax free account, but without worries.

So worries:

Stock manipulation - Well, I tend to trade very, very thinly traded, listed securities myself. If you're talking NYSE listed then 1K shares ain't gonna move the market, and will attract no special attention for the two distinct events detailed.

Tax evasion - Don't think so. You sold shares, trigger a taxable event, and (presumably) will pay the capital gains / loss taxes.

I kind of think there is more going on here than you're suggesting. Unless, as is highly likely, I'm missing something.

Can you perhaps email some clarifications to The Mods. They's grand folks and will post in due course.
posted by Mutant at 3:25 PM on April 23

One more idea that maybe you're considering: are you thinking of trading at a non-market price as a way to launder money? That is, maybe you have dirty money in Account 1, and want to transfer it to clean Account 2. If this is your idea, I believe this would be illegal, but you should definitely invest in a lawyer since it's likely you'll need one eventually.
posted by blue mustard at 3:29 PM on April 23

The biggest problem with your plan, illegalities of trying to cheat the IRS aside, is your assumption that because a stock is low volume, you're the only one interested in it. It seems likely that any stock available for after-hours trading, there are dozens of standing orders to buy if it ever drops below a certain price. You are almost certain to lose out to those automatic orders by trying to manually sync two transactions.
posted by nomisxid at 3:35 PM on April 23

I don't understand why extremely generic, and possibly hypothetical, questions like this are asked anonymously. It's not like they're going to track you down for asking and throw you in jail.
posted by Precision at 3:55 PM on April 23

It is illegal. There is no beneficial change of ownership. It is a wash sale, not only for tax purposes but for SEC purposes. Your chances of being caught if it is at two brokerages are small, but you are putting a sale on the tape that is not legal. I would not do it.

I have a series 4, 7 , 24, 27, 55, 63. I am a branch manager but not your branch manager.
posted by JohnnyGunn at 4:15 PM on April 23

I don't understand why extremely generic, and possibly hypothetical, questions like this are asked anonymously. It's not like they're going to track you down for asking and throw you in jail.

No, but once you're flagged for investigation, it's part of the paper trail that could be used later to build a case against you.
posted by randomstriker at 4:20 PM on April 23

So I think I know what the OP wants to do, but don't know if its legal. The idea is that if you deposit $1k into a Roth IRA, $100k into a non-IRA, and then sell the $100k-asset for $1k to your Roth IRA, you basically managed to get around the deposit limits into the IRA and deposit $100k into it at once.

Ignoring the legalities, I'd agree that there is a good chance of other people picking up your trade and thus, you losing money.
posted by bsdfish at 4:23 PM on April 23

follow-up from the OP

Thank you for the answers. It's pretty clear now that it's illegal. Some of you asked what I was trying to accomplish, so here's an explanation:

I'd like to close out of most of the positions in my regular brokerage account (including the 1000 shares of XYZ), because I'm concerned I may need that money in the short term if my company suddenly lays me off (I know, this is probably a classic example of why one shouldn't invest anything they may need in the next five years). At the same time, there's a good bit of cash in my retirement account, and I'm planning to use that cash to buy 3000 shares of XYZ to hold in my retirement account long term.

Right now, the shares are trading at about 50 cents below the price I bought them at. I'd rather wait until the shares hit the price I bought them at before I sell the shares from my brokerage account (I think it's highly probable they'll hit that price at some point in the next month or two, but of course you never know). But it'd also be nice to see the money in my account now and be done with the whole thing.

This scheme seemed to offer the possibility of having it both ways -- getting the money now, but at the price that I want. The lowest ask prices for these shares during pre-market and after hours is usually insanely high. So it seemed like I could put them up for sale at my non-market price (50 cents more than what it's usually trading at during the day) and then buy them with my retirement account. If someone else decided to swoop in and take them, then all the better (thanks to nomisxid, I later realized that things might mix up and someone else might sell me their shares at that price, with my shares remaining unbought).

At the end of the day, I guess it's just an elaborate way to get around the early withdrawal penalties for retirement accounts. So yeah, I won't do it. Thanks.

posted by jessamyn at 4:49 PM on April 23

There is no magic way to transfer the assets between the two accounts without explicitly moving something from account 1 to account 2. So what you can do is very simple:

You sell the shares in account 1. You now have cash.

Assuming you can legally make a contribution to your retirement account, you now deposit the cash into retirement account 2. You now have a retirement contribution.

If you want, you can then buy shares with the cash in account 2, and now have shares instead of cash in account 2.
posted by zippy at 5:57 PM on April 23

I get what you're trying to do, and I don't think that it's impossible, but I do think that there are a number of places where it may go wrong, and there are easier ways to do it.

Basically, in a perfect world, you'd just put in a limit sell order on your brokerage account, at an above-market price. Then you'd put in a buy order on your retirement account (with a limit high enough to match the sell order), and both orders would execute. You'd end up transferring them from one to the other.

That's in an ideal world. What you'd probably run into is that one account or the other might not offer after-hours trading. If they don't, then the order is going to wait until the market opens, and nothing's going to happen. Many brokerages require you to pay for some upgraded level of account in order to do after-hours trading.

Even if they both offer after-hours, my (admittedly vague) understanding is that there are different clearinghouse networks for performing after-hours trading. Basically, your brokerage and retirement account might not be on the same "network" (ECN) for after-hours, and your retirement account might not 'see' the offering being put out as a result of your sell order with your brokerage. You'd need to contact both your brokerage and retirement account provider and ask them very specifically what ECNs they use for after-hours trading.

Also, you don't know who else may have sell orders out there on the same stock. Just because you make your shares available at some over-market price doesn't mean you're the only person doing it — at any given time, there are probably lots of people with open orders above the market price. So when you put in the buy order and attempt to buy the shares that you have the sell order on, you might not buy those shares; you might get someone else's shares that they just happen to have an open order on. That would leave you high and dry (and that random person feeling very lucky!): you'd be the proud owner of double what you wanted to own, and you'd have lost money versus the current market price on both positions. Bad.

Anyway, so there are a lot of reasons why I think it might not work, even if fundamentally it could be possible. What you should do is just sell the securities from the brokerage account at the current market bid (during the trading day, not after-hours), while simultaneously buying them at market ask. (Use limit orders to prevent getting hit by sudden volatility, of course.) In the worst case you'll end up paying commissions plus the bid/ask spread, although depending on volatility and how you do your limits and how patient you are, and how good your brokerages are about trade execution, you might end up not paying the full spread.

By just doing a straight trade, you end up realizing the loss in your brokerage account in a way that you wouldn't if you managed to do your after-hours above-market buy/sell, but you get the securities into your retirement account at a more attractive price. So it breaks even. Plus, since you're realizing the loss in a taxable account and getting a lower price when you're buying into your (assumedly tax-advantaged) retirement account, your taxable gains are lower.

Also ... just on further consideration, I suspect (although I don't know for sure) that there are rules against buying securities at above-market prices into retirement accounts, especially from yourself. Think about what you're doing if you did this: you're essentially taking a loan from your retirement account. There are such strict rules about doing that, I can't imagine they'd let you get away with backdooring it via above-market-price transactions.
posted by Kadin2048 at 8:05 PM on April 23