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I'm confused on what it means to for security to be substantially equal? For example say I buy a call and then sell it for a loss before expiration. If I buy another call in the same underlying at a different expiration are they the same security?

Also in general say I buy a call and sell it for a loss of 500, say I buy a put in the same underlying during the same expiration and it's a gain of 200. Have I committed a wash sale will I not be able to claim the loss or is the loss of $300 carried over to my final statement?

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    What country's tax rules are you asking about? – Chris W. Rea Jun 25 at 22:33
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If a security has a CUSIP number then it's subject to wash sale rules.

If you sell a stock at a loss and then buy a call option on that stock, it triggers the wash sale rule. So if a call triggers a wash sale in a stock then all call options are equal and a call can trigger a wash sale after realizing a loss on calls of that same stock.

For something more professional than my opinion, I offer an excerpt from Fairmark.com which is a reliable tax trading web site:

Losses on Options

Congress amended the wash sale rule in 1988 so that it applies directly to contracts or options to buy or sell stock or securities. That means you can have a wash sale when you close an option position at a loss, if you establish a replacement position within the wash sale period. The Treasury has yet to issue regulations under this rule, and a host of questions remain unanswered. Foremost among these is the question of when one option is substantially identical to another option.

Until the Treasury decides to issue regulations or other guidance, neither I nor anyone else can say exactly how the wash sale rule applies to losses on options. But there’s a pretty good rule of thumb that should tell you when you’re safe and when you’re on thin ice. If the positions you acquired within the wash sale period permit you to participate in the same up and down market swings as the position that produced the loss, there’s a chance the IRS will say you have a wash sale. If that’s not the case, you should be safe.

And if you really want something that makes your head hurt, read this. Here's an excerpt from GreenTraderTax, another reputable source:

As we stress in our extensive content on wash sale loss deferral rules, Section 1091 rules for taxpayers require wash sale loss treatment on substantially identical positions across all accounts including IRAs. Substantially identical positions include Apple equity, Apply (sic) options and Apple options at different expiration dates on both puts and calls.

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    if a Put and a Call on a share are considered 'substantially identical', someone at the IRS has the level of understanding of a three-year old. – Aganju Jun 25 at 22:49
  • @Aganju They're substantially identical because buying a call and writing a put both create positions that increase or decrease based on substantially the same market movements. Would you argue that if one person buys Apple stock and another person shorts Apple stock they aren't trading in "substantially identical securities" just because the direction of exposure is different? – David Schwartz Jun 25 at 23:37
  • @Aganju - A deep ITM put has a similar performance to stock up towards the strike price so it's deemed substantailly identical. As noted in the Fairmark comments" "You can also turn a sale of stock into a wash sale by selling put options. This rule is not automatic. It applies only if the put option is deep in the money — and there’s no precise standard as to when a put option is deep enough in the money for the rule to apply. The rule applies if it appears, at the time you sell the put option, that there is no substantial likelihood it will expire unexercised." – Bob Baerker Jun 26 at 0:05
  • @David Schwartz - Based on your phrasing, I'm not sure what your Apple argument means. Shorting Apple is not substantially identical to buying Apple. If that's what you meant then we're good. – Bob Baerker Jun 26 at 0:08
  • @BobBaerker The issue is not whether the two actions are substantially identical. The issue is whether the two securities are identical or substantially identical. See the IRS explanation of a wash sale. Shorting Apple may not be substantially identical to buying Apple, but the securities involved are not just substantially identical but literally identical. One involves borrowing precisely the same security the other involves selling. – David Schwartz Jun 26 at 0:21
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Q2:

If you buy a call and sell it for a loss of, then buy a put in the same underlying ... that can't trigger a wash according to very careful study of irs pub 550:

A.

"Buying a put option is generally treated as a short sale, and the exercise, sale, or expiration of the put is a closing of the short sale. See Short Sales, ealier."

earlier ...

B.

"The wash sale rules apply to a loss realized on a short sale if you sell, or enter into another short sale of, substantially identical stock or securities within ..."

p550 Wash Sales section opens with obfuscating language (I want it changed) ...

C.

"A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: ... (3) Aquire a contract to buy substantially identical stock or securities ... "

if you only read that 1 paragraph over and over, you can convince yourself irs will claim that it's a wash.

Aha, but if you buy a put, you do not (3) Aquire a contract to BUY substantially identical ... Instead, you Aquire a contract to SELL!

Selling short is unlike buying long, so I don't believe a wash sale can arise from selling to close a call for a loss and then buying to open a put.

What I want to know is the reverse scenario: I bought a put, sold for a loss and bought a call within the 61 day period. The language in p550 has labelled a put with the general term "stock or securities" which I sold for a loss, then aquired a contract to buy. I have to argue A. and B. above to conclude that selling to close a put for a loss, which is generally treated as a short sale, is akin to buying to close a short sale for a loss ... and so the wash sale rules for short sales apply and not the language in C. above. And then that buying a call is not like entering into another short sale.

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There is no hard and fast rule. But in your case, it's almost certainly a wash sale.

Why? Because the new option you bought had, in the short term, substantially the same exposure as the position you sold (that is, profits or losses from substantially the same market movements). So replacing the old options with the new options didn't materially change your short-term position.

If you sell a position that goes up in value with upward movement of XYZ stock and buy a position that also goes up in value with upward movement of XYZ stock, the general consensus is that you should consider that a wash sale.

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