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I'm wondering if there is any scenario where closing a position could trigger the wash sale rules. For example, would the wash sale rule apply to the transactions in the following scenario?

In June 2016, I open 2 positions:

i buy 100 shares of IBM
i write 1 call option on IBM expiring January 2017

on December 20, 2016, I close 1 position for a loss:

I sell 100 shares of IBM to close my position at a loss

on January 5, 2017 I close my remaining position for a gain:

I buy to close my call before it expires

Notes:

the wording of the wash sale regulation says "entered into a contract or option", so I'm wondering if buying an option to close a position might qualify as "entering" https://www.law.cornell.edu/cfr/text/26/1.1091-1

It seems the IRS considers options and stocks to be substantially identical, as per Internal Revenue Service Ruling 85-87.

  • I believe you could claim that puts and calls are not "substantially identical" securities and would not be affected by the wash sale rule. – D Stanley May 15 '18 at 18:36
  • @D_Stanley it's well established that buying a call option to open a position after selling the underlying stock at a loss triggers the wash sale rule. – james turner May 15 '18 at 18:46
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    @James Turner - buying a call is not substantially identical to shorting shares. You didn't sell the stock at a loss. You shorted shares and you bought them back to close the short share position for a loss. Buying a call is not substantially identically (replacement) to shorting shares. – Bob Baerker May 15 '18 at 18:54
  • As for the original question, all 5 positions are opening positions. They were opened simultaneously in 6/16. The remaining 5 trades were closing transactions. At no point were there any new substantially identical position opened so the 60 day wash sale window doesn't apply. Where this gets sticky is what the strikes are and how the IRS interprets the various legs (Unqualified covered call? Straddle violation?). Lacking specific information, I go with D Stanley's take that there's no wash sale. And gratefully, I let my tax accounting program handle these issues. – Bob Baerker May 15 '18 at 19:12
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    Tax questions require a country tag. Since it was evident you are referring to the U.S., I added that. – Chris W. Rea May 15 '18 at 20:34
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technically no, but that's why they invented the tax straddle rules

the wash sale rules don't apply because you are closing positions on both of the last two transactions. i'm not 100% certain, but it doesn't really matter because....

the constructive sale rules would suggest that you actually "sold" your stock when you bought the call, depending on the strike price and the date of purchase. if you bought the call and the stock on the same day, then this rule isn't an issue, but....

the tax straddle rules would dis-allow claiming the tax loss for the december stock sale, and instead shift the higher basis into the call position, which effectively accomplishes the same thing as the wash sale rule, except....

the qualified covered call rule says that the "tax straddle" rule doesn't apply if the call was purchased out-of-the-money (or close to it). the exact rules are more complicated, but that's the general idea. unfortunately....

the qualified covered call rules also state that the tax loss is shifted to the later tax year if you close both positions within 30 days of each other.

so basically, yes. any time you hold 2 opposing positions, you are subject to the tax straddle rules. while these rules are extremely vague, confusing and capriciously enforced, they will almost certainly have the same effect as the wash sale rule if not worse. moreover, because the tax straddle rules are so vague the irs might chose to apply them to surprising position combinations (e.g. buying one stock and shorting another).

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