WASH rules for Options

Forum|Forum|3 years ago
February 27, 2023
1 reply
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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.

JohnB5677

Level 15

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.

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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sam992116Author

Level 6

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

Level 11

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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