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I am trading stock options. Typically I hold them for few weeks; sell them and wait for the next opportunity to trade them again.

However, now I have been wondering - is it possible somehow to qualify the gain made from stock options for long term capital gain by reopening similar position within certain time period?

For example, one scenario that I am thinking about is that if wash sale rule kicks in then the holding period of stock or stock options I sold (at small loss, but 11 month holding period) and later repurchased (at high gain, but only 1 month holding period) would be added together [http://www.schwab.com/public/schwab/nn/articles/A-Primer-on-Wash-Sales]. Would this really qualify my big-gain position for long term capital gain?

Also this link kinda confirms my suspicion that this is possible:

Also, the holding period of the wash sale securities is added to the holding period of the replacement securities, which increases your odds of qualifying for the favorable tax rate (15% for most folks under the current rules) on long-term capital gains.

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There some specific circumstances when you would have a long-term gain.

Option 1: If you meet all of these conditions:

  • You wrote a call
  • The call was exercised
  • You held the underlying stock used to cover the call for more than a year

Then you've got a long-term gain on the stock. The premium on the option gets rolled into the capital gain on the stock and is not taxed separately. From the IRS:

If a call you write is exercised and you sell the underlying stock, increase your amount realized on the sale of the stock by the amount you received for the call when figuring your gain or loss. The gain or loss is long term or short term depending on your holding period of the stock.

https://www.irs.gov/publications/p550/ch04.html#en_US_2015_publink100010630

Option 2: If you didn't hold the underlying and the exercise of the call that you wrote resulted in a short position, you might also be able to get to a long-term gain by buying the underlying while keeping your short position open and then "crossing" them to close both positions after one year. (In other words, don't "buy to cover" just "buy" so that your account shows both a long and a short position in the same security. Your broker probably allows this, but if not you, could buy in a different account than the one with the short position.) That would get you to this rule:

As a general rule, you determine whether you have short-term or long-term capital gain or loss on a short sale by the amount of time you actually hold the property eventually delivered to the lender to close the short sale.

https://www.irs.gov/publications/p550/ch04.html#en_US_2015_publink100010586

Option 1 is probably reasonably common. Option 2, I would guess, is uncommon and likely not worthwhile.

I do not think that the wash sale rules can help string along options from expiration to expiration though. Option 1 has some elements of what you wrote in italics (I find that paragraph a bit confusing), but the wash sale does not help you out.

  • Can you check Stephen's answer. He found this quote "Wash sales. Your holding period for substantially identical stock or securities you acquire in a wash sale includes the period you held the old stock or securities." – john1234 Mar 9 '16 at 0:47
  • @HalfWay I think Stephen's answer is largely correct, but I'm not aware of any documentation, or precedent that will consider options with different expirations to be "substantially identical" for wash sale rules nor options with their underlying. "Substantially identical" usually means something like you sell one ETF and buy a different ETF that has mostly the same components. Option and stock are different. Options with different expirations are different. If someone can document anything to the contrary, I would be extremely interested. Until I see it though, I don't believe it exists. – user32479 Mar 9 '16 at 1:55
  • @HalfWay For just options, maybe options on SPY and options on SPX (i.e. options on the ETF and index options) might be "substantially identical" at same expiration and effective strike. Just as an example using only options. That's different than a Feb expiration SPY option with a March expiration SPY option. And of course if you're in and out of the same option multiple times (strike, expiration, and underlying) that can definitely lead to a wash sale. – user32479 Mar 9 '16 at 1:57
1

According to page 56 of the 2015 IRS Publication 550 on Investment Income and Expenses:

Wash sales. Your holding period for substantially identical stock or securities you acquire in a wash sale includes the period you held the old stock or securities.

It looks like the rule applies to stocks and other securities, including options. It seems like the key is "substantially identical". For your brokerage / trading platform to handle these periods correctly for reporting to IRS, it seems best to trade the same security instead of trying to use something substantially identical.

  • Well, for example, if wash sales rule kicks in then the holding period of the stock I sold and replacement stock is added together [schwab.com/public/schwab/nn/articles/A-Primer-on-Wash-Sales]. I am wondering if this could be somehow leveraged to qualify for long term capital gain. – john1234 Mar 8 '16 at 21:21
  • To my knowledge, the wash sale rule prevents you from taking a loss and requires you apply the loss you would have taken to the new basis. However, even if you have a wash sale, the holding period with respect to long term capital gains resets. – Stephen Grimes Mar 8 '16 at 21:23
  • marketwatch.com/story/… seems to suggest otherwise: "Also, the holding period of the wash sale securities is added to the holding period of the replacement securities, which increases your odds of qualifying for the favorable tax rate (15% for most folks under the current rules) on long-term capital gains." – john1234 Mar 8 '16 at 21:30
  • Ok, looks like you're right about the wash sale / long term capital gain rule. According to page 56 of IRS publication 550: "Wash sales. Your holding period for substantially identical stock or securities you acquire in a wash sale includes the period you held the old stock or securities." I'll have to edit my post. – Stephen Grimes Mar 8 '16 at 23:07

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