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If I buy an option, wait 3 months, sell it, and then buy it back the next day, "wash sale" rules will apply. But, what happens when these three actions use slightly different options (e.g., strike prices differ by one level)? The point to realize is that my exposure/delta stays about the same even though the option itself changes. Is anything published by the IRS stating when the wash sale rules (or straddle rules for that matter) kick in for similar options, or should I just use my discretion?

To push things beyond "slightly", what happens if I buy a call option, wait 3 months, sell it for a loss, and then sell a put option the next day? Can I always claim the full short-term capital loss for taxes? To be clear, I never held the stock itself and just did these 3 trades (and, if it helps to analyze this, assume that the put option gets closed two years later, in a 4th trade, for a long-term capital gain).

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In my opinon, https://fairmark.com/ is a reputable site for tax advice. Here's an abbreviated version of their take on the wash sale possibilities involving stock and options:

If you sell a stock at a loss, it's a wash sale if you buy substantially identical stock within the 61-day wash sale period. You’ll also have a wash sale if you enter into a contract or option to buy substantially identical stock.

Example: On March 31 you sell 100 shares of XYZ at a loss. On April 10 you buy a call option on XYZ stock. (A call option gives you the right to buy 100 shares.) The sale on March 31 is a wash sale.

It doesn’t matter if the call option is in the money. You’ll have a wash sale even if you never exercise the option and acquire the stock.

You can also turn a sale of stock into a wash sale by selling puts. It applies only if the put option is deep in the money and there’s no precise standard to determine that. The rule applies that when you sell the ITM put and there is no substantial likelihood it will expire unexercised. IOW, selling the put option is roughly equivalent to buying the stock.

Example: On March 31 you sell 100 shares of XYZ at a loss. On April 10 you sell a put option giving the holder the right to sell to you 100 shares of XYZ at a price substantially higher than the current market price of the stock. The sale on March 31 is a wash sale.

As an ITM put seller, you participate in the up and down movement share price, unless the price moves higher than the strike price. If the strike price is high enough, the chances of that happening are small and you’ve simply found a different way to continue your investment in the stock.


EDIT: Add'l Info:

Another reputable site for tax advice on trading is Greentradertax.com . Re wash sales, they cite IRS Pub 550:

A wash sale occurs when you (a taxpayer) sell or trade stock or securities at a loss and within 30 days before or after the sale you:

  • Buy substantially identical stock or securities,
  • Acquire substantially identical stock or securities in a fully taxable trade,
  • Acquire a contract or option to buy substantially identical stock or securities, or
  • Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

They also add:

IRS regulations for wash-sale losses require taxpayers to calculate wash sales based on “substantially identical” positions. That’s different from the rule for brokers that require “identical” positions. This can be a challenge for active traders who trade stocks and options, or just options but with constant changes in exercise dates - these are substantially identical positions.

  • Your answer does not say exactly how "substantially higher" the put strike price needs to be in your second example - I'm seeking that rule. Also, it would help to add a reference published by the IRS backing up your second example...I imagine the IRS leaves it intentionally vague so the final answer really is to "just use my discretion" like I originally supposed. – bobuhito Mar 31 at 19:53
  • My answer does not say exactly how "substantially higher" the put strike price needs to be because as per Fairmark, "It applies only if the put option is deep in the money and there’s no precise standard to determine that." I can't add a reference published by the IRS backing up the second example because it's Fairmark's opinion of the situation. – Bob Baerker Mar 31 at 20:21
  • Considering that many people do complex option strategies nowadays (I believe), many of which are explicit option straddles/hedges (i.e., buy a put and a call at the same strike price), I'm surprised the IRS doesn't give us more specific rules. You've probably got the best answer, but I'll give others a chance to correct you, or to offer an answer with IRS references, before marking anything. – bobuhito Mar 31 at 20:32
  • I agree. Option trading has continuously increased (see open interest as well as the number of optionable stocks and ETFs) and as users gain experience, they realize the benefit of hedging and move up the food chain to spreads, straddles, etc. The IRS is notoriously ambiguous about many of the rules to the point where in reference to tax implications, Green Trader and Fairmark say that "we think that" rather than "we know that". I don't know if this lapse is intentional on the part of the IRS. – Bob Baerker Mar 31 at 21:51
  • The original scenario is buy an option, sell it at a loss, and buy it back. I don't think the rules would be the same for selling a stock at a loss, then turning around and buying an option to buy it back. – D Stanley Apr 1 at 13:25

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