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I have 300 shares in a regular account with basis 166, trading @ 500. I have over 300 shares of the same in an IRA. I plan to sell 300 shares in the IRA; write 3 puts in the IRA for less than $10,000 total credit (the rounded up total of the asks minus some % of the bid-ask spread); and buy the same 3 puts in the regular account for ~$10,000 debit. The expiration dates are spread out over three years, I.e., January of year 1, Jan. year 2, and Jan. Yr. 3.

My question is basically how the weird, offsetting put positions are treated. I assume if this is a bad idea, it's because of complicated tax law regarding offsetting positions, and that’s what I’m hoping somebody can answer to, but I will accept any good criticism or support you have of the idea if it’s relevant and verifiably accurate. I also welcome alternative ideas, but they are off topic if they don’t address why not to do this one.

Here’s how the idea came to be:

I hold 300 shares in my taxable account, worth $500 each. I’m aiming to turn this into a cash cushion to fund a three-year break from work by selling them for $150,000. That’s $50,000 per year.

I fear a hefty tax bill due to this year’s work earnings. So, Instead of selling them, I bought put options to hedge against stock drops.
The put expirations are spread out over three years.

Looking for ways to offset the cost of the puts, I think of writing put contracts in my Roth IRA (among other things like just writing calls.) Writing the puts seems like a bad idea at first because it mathematically removes the hedge on the shares. But then, with the IRA in mind, I realized that I don’t need a hedge on the shares if I just sell. If I’m worried about taxes of creating a large cash cushion in one tax year now, why not just sell $150,000 worth of shares in the IRA instead of the taxable account? The obvious answer is that I’m not retirement age and so I don’t have access to the funds if I do that. But the short put positions in the IRA and long put positions in the taxable account create an interesting situation if they are the exact same contracts and were opened at the money.

At expiration, if the market is down, I exercise the contract in the taxable account, getting $50k as planned. I get assigned In the IRA, forcing me to buy back shares at the sale price. So I’m good there.

If the market is up, the taxable account gains, offsetting the put cost. I can sell $50,000 worth of shares as planned. The IRA puts will expire worthless, and I won’t be able to buy as many shares back as it sold due to the price going up, but I don’t mind that scenario at all because it’s offset by not needing to sell as many shares as planned in the taxable account.

This approach spreads taxes, potentially shifts wealth from the IRA to the taxable in a manner that is attractive to me, and limits risk where I want it to at the expense and addition of risk where they are not problems for me.

I don’t see a downside. What am I missing?

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  • I don't think you can sell short in an IRA.
    – littleadv
    Nov 30, 2023 at 0:42
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    The rule is that you can’t use IRA assets as collateral for a loan, so you can’t short stocks, which is technically borrowing. What I meant is write a put, also referred to as selling to open a short put position. You can write puts in an IRA if you hold enough cash to cover the full risk of the position (I.e. the strike price times 100 shares.) That’s why I propose the idea to sell the shares in the IRA instead of the taxable account, and use the proceeds to secure short put positions. Nov 30, 2023 at 1:46
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    wash sales do not apply in an IRA because you can't claim a loss. You may have trades that are classified as a possible wash sale just because of the timing but they have absolutely no effect on taxes.
    – D Stanley
    Nov 30, 2023 at 14:40
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    The wash sale rule can indeed be triggered by a transaction in an Individual Retirement Account (IRA) and impact a taxable account. irs.gov/pub/irs-drop/rr-08-05.pdf ISSUE If an individual sells stock or securities for a loss and causes his or her individual retirement account or Roth IRA to purchase substantially identical stock or securities within 30 days before or after the sale, is the loss on the sale of the stock or securities disallowed? HOLDING The loss on the Sale of stock is disallowed under § 1091. Nov 30, 2023 at 20:54
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    I said ever. Liming risk is certainly possible, though usually at the expense of limiting growth. But if the goal is to completely eliminate risk, the market really is the wrong place to have your money. Part of investing is being able to accept that paper losses are generally not something to panic about, or even necessarily to take action about. Not everyone is comfortable with that, and there's nothing wrong with picking any point along the spectrum that you are comfortable with as long as you understand what to expect and are OK with it happening.
    – keshlam
    Dec 2, 2023 at 22:02

1 Answer 1

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If you buy puts in one account and sell the exact same puts in another account, you have an offsetting position (short against the box). Therefore, your long 300 shares remain unhedged.

You might consider a low/no cost wide long stock collar to protect yourself. You'll have upside potential, and if the strike is high enough and you're assigned, the additional appreciation could pay the tax bill. If share price craters, you're largely protected. Read this

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  • Thanks @Bob! Selling calls (creating a collar) offsets put costs. Still, I find value in the IRA short puts considering I’ll sell 300 IRA shares on day one. Keeping all 600 shares and adding a collar defers taxes and locks gains without paying put costs outright. My realization was that same goal is achieved by selling IRA shares and writing the offsetting puts. Selling calls would be a bonus, as would keeping the high end of the upside potential by not selling calls. So, I might sell calls, but only in addition to everything else using the IRA. Any reason that won’t work? That’s my question. Dec 3, 2023 at 9:39
  • Thank you, @Bob, for alerting me to the “short against the box” position. I’ve heard that phrase before but never paid any mind to what it meant. Looking into it more I found that generally shorting against the box treats the short sale as a constructive sale, triggering capital gains tax. So now I want to know if my suggested plan triggers an immediate capital gains tax because that would blow up the whole idea, answering my question. “Am I missing some negative consequence?” Dec 3, 2023 at 10:54
  • At this point, I have no idea what positions you're referring to because the multiple word descriptions are confusing. It would be much easier to evaluate if you edited your question (or asked a new one) where you itemize the positions. For example, [[I own 300 shares in my regular account with a cost basis of $50 that are trading at $100. I plan to buy 3 Mar $100 puts for $18 each in my regular account and sell 3 Mar $100 puts for $18 each in my IRA account. ]] That's crystal clear. Dec 4, 2023 at 19:09
  • Thanks @Bob. I should update the question. I can see that I'm confusing, sorry. I'm talking about 300 shares in regular account w/ basis 166, trading @ 500. I have over 300 shares of the same in IRA. I plan to sell 300 shares in the IRA; write 3 puts in the IRA for less than $10,000 total credit (minus some % of the bid-ask spread); and buy the same 3 puts in the regular account for $10,000 debit. Expiration dates Jan '24, Jan '25, and Jan '26. Does that help? My question is basically how the weird, offsetting put positions are treated. I assume if this is a bad idea, it's b/c of tax law. Dec 5, 2023 at 20:52
  • The IRA shares are irrelevant since they are tax sheltered. If you sell 3 puts in the IRA and buy the same 3 puts in the regular account, they are offsetting positions. Whatever one makes, the other loses. Therefore, the 300 long shares in the regular account are unhedged. Dec 6, 2023 at 20:12

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