1

If I close a put position at a loss in an after-tax account and buy 1 share of the underlying in an IRA within 30 days, how much of the loss is permanently disallowed according to IRS wash sale rules?

Would it be all of it? Or 1% of the loss?

Concrete example:

After-tax Account

March 2 Sold 1 XYZ Mar 19 2021 185.0 Put @ 6.25

March 4 Bought 1 XYZ Mar 19 2021 185.0 Put @ 15.8

Net loss: $955

IRA

March 2 Buy 1 share XYZ XYZ INC CLASS A @ 193.25

Improve this question
2
  • why 1% specifically?
    – littleadv
    Apr 6, 2022 at 20:26
  • 1 contract controls 100 shares
    – riddle_me_this
    Apr 6, 2022 at 20:27

1 Answer 1

Reset to default
1

Congress enacted the wash sale rule to prevent traders from manipulating their tax burden by realizing security losses and re-entering a 'substantially identical' position in order to be able to participate in it’s price increase. Unfortunately, Congress never clearly defined what 'substantially identical' means.

The only way to avoid this complication is to make sure that you never have a carry over or disallowed wash sale violation. ​ As for your question, you would have to first determine if this was a 'substantially identical' replacement position. If so, I would 'guess' that the disallowance would be one percent since a standard option is for 100 shares but I don't know that for a fact.

Improve this answer
3
  • Yes, if I sold short 100 shares and closed at a loss instead, one would reasonably only disallow the amount attributed to the 1 share in the IRA. No rule specifically, but that seems to be the spirit of the law.
    – riddle_me_this
    Apr 7, 2022 at 10:45
  • Tax rules clearly indicate that when the identical security is involved, the 60 day window applies to a realized loss (XYZ stock and XYZ stock). When not the same, determining what is substantially identical is the problem (XYZ stock and XYZ options).
    – Bob Baerker
    Apr 7, 2022 at 13:27
  • Ok, actually, I see in §1091 there is a portion about short sales.
    – riddle_me_this
    Apr 7, 2022 at 16:19

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .