Rolling OTM calls and wash sale cost basis

[in_the_wagon]

There were some great explanations and links here:  https://ttlc.intuit.com/community/taxes/discussion/wash-rules-for-options/00/2916250.

However, parsing the IRS legalese physically hurts my brain. My situation is a simple OTM Roll of a Short Call.

#1 I sell an OTM call for PEP for $400. I close it for $500. I am out $100. The cost basis is $500 afaik. 

#2 I then immediately sell another ITM PEP for $200. It expires worthless. The cost basis is $0 afaik.

All transactions occur in 2022.

Ignoring wash sale issues, my net is $100 positive. 

However, the $100 is a wash rule loss in #1 afaik.

However, again, it seems I can adjust the cost basis of #2 from $0 to $100. 

If so, my net is $100 positive.

Is this correct?

[tagteam]

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@in_the_wagon wrote:

However, again, it seems I can adjust the cost basis of #2 from $0 to $100. 

If so, my net is $100 positive.

Is this correct?

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That appears to be correct; the loss from the first transaction is rolled forward to the second transaction, but what about your 1099-B? 

[in_the_wagon]

Hi Champ,

Thank-you for your reply.

My brokerage, Schwab, simply sums the gains and losses for option trades as if wash sale rules did not exist or apply. 

Does it matter if my tax return does not identify these as wash sales if this would not change the outcome?

[Mike9241]

the Internal Revenue Code and the Regulations do not define “substantially identical property” or “substantially identical securities” except to state in Regs Sec 1.1233 (pertaining to short sales) that it is to be applied on a facts and circumstances basis and Regs Sec 1.1091 is silent on the definition.

see this  thread

https://www.optionstaxguy.com/substantially-identical 

i think the way Schwab handles options is that a wash sale is not recognize unless the expiration date and strike price are the same.  Other brokers may have a different view.

you did not specify the two main factors on the two options - strike price and expiration date.

i would follow the brokers reporting when preparing your tax return. 

you should probably contact them to find out how they handle options for wash sale purposes. 

[in_the_wagon]

Thanks again.

Schwab said they merely compare CUSIPs within a single account to identify wash sales. And the CUSIPs need to be identical between two transactions. So they will miss wash sales involving Berkshire Class A and Class B shares, between preferred and common shares, across accounts, and across brokerages, (obviously). So, in general, I do not deem Schwab sufficient. 

Regarding the main two factors: When I roll a short OTM call option I always have a different expiration and/or strike. 

It sounds like the assertion is that no two short CALL options on a single underlying such as PEP are substantially identical if they differ in expiration or strike. 

Any idea whether there are any experts or tax attorneys or tax persons disagree and file otherwise?  

Thanks again.

[tagteam]

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@in_the_wagon wrote:

Does it matter if my tax return does not identify these as wash sales if this would not change the outcome?

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Probably not. How would it, in fact? The resulting gain is exactly the same (same tax outcome, regardless). 

Even if noted by the IRS, your tax liability would not change.

[tagteam]

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@in_the_wagon wrote:

......they will miss wash sales involving Berkshire Class A and Class B shares, between preferred and common shares.......

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Just for the record here, preferred and common stock issued by the same corporation are not considered to be substantially identical for the purposes of the wash sale rule.

See https://www.irs.gov/publications/p550#en_US_2022_publink100010607

[fanfare]

If you use aggregation (TurboTax summary) of Box A and or Box D,

you will have no detail reporting requirement because Schwab did not/will not report any wash sales.

Form 8949 is not required in this case.

@in_the_wagon