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WASH rules for Options

If you are selling a stock/mutual fund/bond at a loss one can't buy same security within 61 days (30 before and 30 after of trade date). It is due to WASH rules. That is clear.

 

What is similar rule? I assume if you sold VFINX (vanguard S&P500 Index fund) at loss and bought SPY or any other S&P500 Index fund they will be consider similar. What are other criteria of similar? If I sold Ford Motor at a loss and bought GM within 61 day window does WASH rule apply?

 

Now real question What are WASH rules for Options?

 

Option they are chains for same underlying security and expiration are weekly or month so more.  Each and every Option can make or loose money. They are same underlying. Lets say Ford is trading $10 so $11 or $122 Calls are similar or may be not.

9 Replies
JohnB5677
Employee Tax Expert

WASH rules for Options

If you are selling a stock/mutual fund/bond at a loss one can't buy same security within 61 days (30 before and 30 after of trade date). It is due to WASH rules. That is clear.

  • You stated that perfectly.

What is similar rule? I assume if you sold VFINX (vanguard S&P500 Index fund) at loss and bought SPY or any other S&P500 Index fund they will be consider similar. What are other criteria of similar? If I sold Ford Motor at a loss and bought GM within 61-day window does WASH rule apply?

  • This is not as clear cut. 
    • If an investor sells the SPDR S&P 500 ETF (SPY) at a loss, they can immediately turn around and purchase the Vanguard S&P 500 ETF. 
    • The rationale is that the two S&P 500 ETFs have different fund managers, different expense ratios, may replicate the underlying index using a different methodology, and may have different levels of liquidity in the market. Presently, the IRS does not deem this type of transaction as involving substantially identical securities and so it is allowed, although this may be subject to change in the future as the practice becomes more widespread.1

Now real question What are WASH rules for Options?  

Option they are chains for same underlying security and expiration are weekly or month so more.  Each and every Option can make or lose money. They are same underlying. Let's say Ford is trading $10 so $11 or $122 Calls are similar or maybe not.

  • If the underlying stock is the same: if you sell stock at a loss, it is a wash sale by trading in options in the same stock. Secondly, losses from the options themselves can be wash sales.

Substantially Identical Security: Definition and Wash Sale Rules

Publication 550 Investment Income and Expenses

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WASH rules for Options

Lets say I am Bullish on Ford stock (example only). Ford is trading @ $10

 

I sold Short PUT for $1 with strike of $10. But stock went down to $9.5. Now this option is worth $1.5.

 

Lets say I roll this option to next month for $1. Basically I am buying back Short option for $1.5 ($0.5 loss) but at same time I am selling next month Option at  strike of $9 PUT for $1.

 

Q. Would wash rules apply? They have same underlying but they have different strikes and different expiration.

 

SPY or VFINX may not be similar according to tax expert. How 2 options with same underlying , but different strikes and expiration are similar? They have different liquidity, profit/loss profiles?

GeorgeM777
Expert Alumni

WASH rules for Options

Yes, in 1988, Congress amended the wash sale rule so that it applies to options.   While there is no definitive guidance from the Department of the Treasury on how the wash sale rule applies to options, in the example you describe there is a chance that the IRS would disallow the loss realized when the short put was closed because the subsequent short put, involving the same underlying security, was effected within the wash sale period.   While the short puts in your example have different strike prices and different expirations, there is no definitive guidance whether these differences make these options neither the same or substantially similar.

 

@sam992116 

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WASH rules for Options

Thanks. I did online search i got very similar answer as there is NOT definitive guideline regarding Options what would be considered same or substantially similar.

 

Q: How to treat these Options for taxes? Take the Loss without adjusting for WASH rule and wait and see if you get a letter in mail?

 

 

Just to give an example. Debt or Credit Spreads are very popular trading strategies. In a successful trade you make money in one Leg (Long leg in Debt Spread and Short Leg in Credit Spread) and loose money on other leg. But money you make with one leg is much more than losing leg. These both legs have same underlying stock, same expiration and both are either CALLS or PUTS, Lets say you close these trades within 31 days (including day of trade) or open a new trade after on successful trade within this 61 day window. Now would this whole trade be subject to WASH rules. You never hear in financial or accounting media, if trading spreads, don't close it within 31 days or don't open new trade after successful trade.

AmyC
Employee Tax Expert

WASH rules for Options

The IRS Publication 550, Investment Income and Expenses includes wash sales and states: 

  • Options and futures contracts. The wash sale rules apply to losses from sales or trades of contracts and options to acquire or sell stock or securities. They do not apply to losses from sales or trades of commodity futures contracts and foreign currencies.
  • Certain losses on short sales of stock or securities are also subject to wash sale treatment. For information, see Wash Sales, later.
  • Straddles are covered here.
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WASH rules for Options

If you talk to TD Ameritrade, when it comes to options, they will tell you that the only "substantially identical" security is the option  itself.  That's how they report it to the IRS.

I would rely on the supplied 1099-B from the broker.

 

@sam992116 

If not, every spread trade or covered-stock trade which involves options on the same underlying stock would be a wash sale transaction. That doesn't happen.

WASH rules for Options

they will tell you that the only "substantially identical" security is the option itself. Does that mean for example, that the SPX 4500 call option expiring today is a different security of the same strike that expires tomorrow? That is, the 2 options are not  "substantially identical"?

RobertB4444
Employee Tax Expert

WASH rules for Options

Using that guideline then no - today's option and tommorrow's are not considered substantially identical.  

 

However, as @GeorgeM777 states above there is no definitive guidance from the service with regard to this so if your 1099-B arrives and shows a wash sale loss then I would enter it as such.

 

@rmbatp 

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WASH rules for Options

I spoke with a rep at ThinkorSwim who confirmed that today's option and tomorrow's are not substantially identical and that TOS does not report them to be. I trade with 3 brokers, I'll check for wash sales but will manually edit any that show wash sales for different options.

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