Wash Sales and Options -
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- May 27, 2015 | By: Robert A. Green, CPA;
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If it applies, it disallows write-offs
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Specifically, the following situations count as a wash sale: You sell or trade stock, mutual fund shares, or bonds at a loss. You also have a wash sale if both of these apply: You sell stock at a loss. Your spouse — or a corporation you control — buys the same stock within the 30 days before and after the date of the sale.
Stock Splits What are stock splits? There are perfect end runs around the wash-sale rule, most of which use options strategies. If you sell a stock for a loss and within 31 days buy a call option on that stock, you have violated the wash-sale rule. The penalty of the rule is that the loss on the stock is not crystallized.
Instead, the amount of the loss is added to the cost basis of the replacement property; in this case it is the call option. Ironically, you are now free to buy XYZ again without concern for the wash-sale rule. The rule does not work the same way when the process is reversed. It is not symmetrical in the treatment of when you sell a call for a loss and then buy the underlying shares. Exchange-traded index options are taxed differently than options on individual stocks.
Index options are marked to market at year-end.
These exchange-traded index puts and calls are taxed under IRC Section , like futures. Make sure the options you buy are options on the index and not on the ETF. This entails buying as many shares as you have underwater. After 31 days, sell the first lot of shares and take the loss.