<<Just to make sure I've got it, if the sale were direct the
related person rule would apply and my claim about the tax
asset being destroyed would hold, but because Mr Market is
in the middle it doesn't.>>
Not quite. There are two different Code sections, Section 267, which disallows direct and indirect sales between specified related persons, and 1091, the wash sale rule which disallows loss on a sale followed by a purchase (and certain other types of transactions) by the same taxpayer within 31 days.
For the wash sale rule, the loss is preserved by carrying over basis onto the purchased stock. For the Section 267 related party rule, the loss is preserved only to a limited extent, it can be used to reduce gain recognized by the purchasing related party.
Two further points. A sale between a beneficiary and a IRA would be between related parties. I misread the statute, related persons includes "a beneficiary of a trust and a fiduciary of the trust." When you sell to an IRA, you are selling to the fiduciary; the language is a little obscure and I misread it the first time
Now, a careful word parser such as yourself will notice that when I described section 267, I said, a "direct OR INDIRECT sale" between related parties. There is an old (1947) case (McWilliams) in which the Supreme Court interpreted these words to extend to a series of sales on an exchange, where the husband directed his broker to sell specified numbers of shares from his account and to purchase a like amount, at the closest possible price, in his wife's account. The court held that this consisted an "indirect" sale and disallowed the losses. The case has not been extended very far, and I don't think any tax practitioner would apply it where the sales happen on different days, and most would say a space of an hour between sales is enough, given the market risk that this entails. For example, in 1987, the tax court considered silver straddle losses recognized by two brothers who had opened accounts at E.F. Hutton. Of some historical interest, the court believed that although they intended to generate tax losses to shelter income, each hoped to profit economically, but unfortunately, two other brothers with the last name of Hunt got active in the silver market at the same time and caused a few disruptions, resulting in substantial losses to the brothers. It turned out, by coincidence, that some of the trades were executed in such a way that one brother was selling, through the Comex, to the other. The court refused to disallow the losses, distinguishing McWilliams, saying, "there must be a nexus between the sale and the purchase for the McWilliams indirect sale doctrine to apply. Where there is no direct transaction, that nexus is supplied by the prearranged plan present in McWilliams but lacking in our case."
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