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Let's say you sell an equity on the 1st of the month for a loss. On the 10th of the month, you sell a put on the same equity.

If the put is not exercised by the counterparty of the put within 30 days, is it still a wash sale?

(I'm assuming that if they buyer of the put exercises within 30 days, it's a wash sale... right?)

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If you buy (or sell) a substantially identical security after realizing a loss, it's a wash sale. It doesn't matter what happens subsequently to your option (assignment, exercise or expiry). It is or it isn't.

If it is a wash sale, it's not a problem if all involved positions are closed by the end of the year. It becomes an accounting issue if a wash sale is carried over into the new tax year.

The real question is, is it a wash sale? That's where the answer gets murky.

From Fairmark.com:

Selling Put Options

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. In this circumstance, selling the put option can be roughly equivalent to buying the stock.

And from the NASDAQ:

SELL STOCK, SELL PUT

Lastly, clients can sell their stock for a loss and then sell a put option on those shares.

Example: Mary buys XYZ stock at $50; it is now at $35. Mary sells at $35, realizing a $15 loss. Mary then sells a 31-day put, allowing the buyer to put that stock back to Mary at $40 a share. If the stock stays below $40, Mary gets her shares back. Is this a wash sale?

In a put sale, the government will declare a wash sale when the put position is substantially identical to the stock – that is, when there is a high likelihood that the put will be exercised (unlike the call purchase rule that damns any call purchase).

Most tax practitioners would have no issue if Mary sells an out-of-the-money put, a slight caution if Mary sells an at-the-money put and a genuine concern if the put is in-the-money, with concern growing as the put gets deeper and deeper in the money.

  • You wrote "it's not a problem", but don't you lose the ability to write-off the entire loss of the wash sale? Also, what do you mean by "it's an accounting issue" when the sale is one year and the exercise is the next year? – user105094 Dec 29 '20 at 19:28
  • If I sell 100 shares and realize a loss on Dec 15th and buy the 100 shares back on Dec 16th, it's a wash sale. The loss on the first shares must be carried forward until the 2nd 100 shares are sold. Nothing lost, just deferred (an accounting issue). If I sell the new shares by Dec 31st, I get to claim the original loss this year as well as the new shares gain or loss. If I do not sell the new shares by Dec 31st, the loss is carried forward and the new shares have an adjusted cost basis. A monster of an accounting headache is buy 1,000, sell 200 at a loss, buy 300, sell 400, etc. – Bob Baerker Dec 29 '20 at 19:36
  • So if you sell the put this year (on an equity you just sold for a loss), and then the counterparty to the put exercises within 30 days, but that exercise date is next year, then do you claim the loss of the original equity sale for this year even though it's a wash sale? – user105094 Dec 29 '20 at 19:49
  • Per the explanations in my answer, when you sell the short put, if it's a wash sale (deep ITM put), the realized loss on the stock is deferred until next year if the short put is not closed this year. If you sell a qualified short put (OTM) and you are assigned this year (within 30 days of realizing the stock loss), then the realized loss on the first stock position is deferred until next year if new shares are not closed this year. – Bob Baerker Dec 29 '20 at 20:02
  • So conversely, sell equity on the 10th of December for a loss. Sell a barely OTM put this year on December 29th, and it's not exercised by the put's counterparty until the 2nd of January, then the full original equity loss is for this year? Is that correct? Then next year, the cost-basis of the purchase forced by the put has to be adjusted, but that only potentially affects next year's taxes, and not this year's taxes. – user105094 Dec 29 '20 at 20:14

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