This is probably best illustrated with an example:

  • Day 1: I buy 10x AAPL for $1000
  • Day 2: I sell 10x AAPL for $2000 ($1k gain)
  • Day 3: I buy 10x AAPL for $1000
  • Day 4: I sell 10x AAPL for $500 ($500 loss)
  • Day 5: I buy call LEAPS on AAPL and hold until next year

Come tax season next year, will I owe taxes on $1000 or $500? In other words, does the $500 wash sale get matched with my previous trade (which gets settled this year) or with the LEAPS (which won't be settled until the year I sell)?

  • Thanks! Added a tag to reflect that this is for US taxes :) – tic Apr 22 at 20:14

A LEAP can be a put or a call. I'm going to assume that you mean that your Day 5 transaction is a call LEAP. If so, it is a 'substantially identical' security and therefore it triggers a wash sale violation. You will have to pay taxes on $1,000 since the $500 loss must be deferred.

  • Thanks - yup, I meant a call LEAP. I was reading on fairmark.com/investment-taxation/capital-gain/wash/… that when determining whether a loss is a wash sale, you can do so chronologically, looking 30 days before and after the sale date. If that were the case, wouldn't I be able to match the loss with the buy that happened before rather than the buy that happened after? – tic Apr 22 at 21:42
  • The default for brokers is FIFO. However, you can designate which purchases are sold. Your problem is that all of your buy prices are higher than your Day 4 sale price so there's no way to mitigate that loss. – Bob Baerker Apr 22 at 22:06
  • I see - so if instead, it were (sorry for lack of formatting) --- Day 1-2: Buy for 500, sell for 2000 (+1500) --- Day 3-4: Buy for 1500, sell for 1000 (-500) --- Day 5: Buy call LEAPS --- then the wash sale would be able to be applied to the previous buy? – tic Apr 22 at 23:22
  • Replacement shares bought within 30 days before or 30 days after realizing a loss is a wash sale and must be deferred. Day 3-4 is the realized loss. Day 5 is the replacement shares and creates the wash sale so day 3-4 loss cannot be utilized until day 5 LEAP is sold. – Bob Baerker Apr 23 at 10:29

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