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I have a stock position that went south really quick and I have been holding on for about 5 months now. My last average down was 4 months ago.

My average price is $12 and the stock is currently trading at $8. If I sell an ITM covered call with a strike price of $8 and I gain say a $1 of premium then my loss will be $3 per share. I haven’t purchased any more of the underlying stock and won’t be doing so for 31 days after writing the call.

Will there be any tax implications from writing this covered call? I’d really like to avoid a wash sale.

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    Why do you want to avoid a wash sale (I'm trying to make sure you understand what a wash sale is, which is a common misconception)
    – D Stanley
    May 17, 2021 at 22:23
  • Because I want to realize a loss. If my covered call gets assigned I’ll have a negative gain.
    – Motif_90
    May 17, 2021 at 22:28
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    You can still realize a loss. Wash sales do not prevent you from taking a loss - that's the common misconception. They just defer the tax benefit as worst. If you exit the position in the same tax year then a wash sale has no effect.
    – D Stanley
    May 17, 2021 at 22:30
  • Of course they don’t prevent me from realizing a loss. But I want to harvest a true loss to offset my gains.
    – Motif_90
    May 17, 2021 at 22:32
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    And you can do that so long as you don't buy the stock back within 30 days and hold it past the end of the tax year.
    – D Stanley
    May 17, 2021 at 22:33

2 Answers 2

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A wash sale occurs if you buy substantially identical replacement shares within 30 days before or 30 days after realizing a loss. If your last purchase was 4 months ago and you don't buy the stock back for 30 days after realizing a loss then there will be no wash sale. Note that this pertains to the date of the realized loss not "after writing the call".

A wash sale has no tax consequences if you are completely out of the stock by the end of the year and remain out for 30 days. It only comes into play if you carry an adjusted wash sale position into the next year.

Another thought for your consideration: If you're willing to forego the $1 of premium and there's a $10 call trading for 1/2 the price of an $8 call, consider a Repair Strategy. It will get you out at break even if your stock rallies to $10. You must have spread approval from your broker to do this.

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If the call is exercised, that means that the price of the stock went above $8 but you sold it for $8 for a net loss of $3 per share. No wash sale rules will apply since the position was exercised in the same tax year and you're not planning to buy any more stock for >30 days.

If it is not exercised, that means that the stock went below $8 and your paper losses have grown (less the $1 that you got in premium). Wash sale rules do not apply since you haven't yet realized a loss. If you do sell the position for a loss at some point you'll just need to not buy back for 30 days to avoid any potential wash sale implications.

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