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Box spread "substantially identical"?

  1. I put on some $20/$30 and some $25/$39 box spreads. I closed out the $20/$30 for a profit before year end. The $25/$39 are still open, but will be closed before 30 days. My question is does the profit on the entire $20/$30 spread aggregate as a net profit(thus no wash sale impacts) or would each leg be counted individually(I took a loss on some of the legs) and thus create a wash sale when I exit my $25/$39 spread.

    Thanks for the help!
  2. My understanding is that different strikes / maturities of options are not substantially identical to each other. however, if you trade the $20 leg at a loss and later rebuy it, that could trigger a wash sale. So since you don't seem to have any of the same strikes, I don't think you'd get a wash sale. I'm not an options tax expert, so double check this.
  3. I have somewhat similar situation that I've been looking into lately. There are a lot of complicated rules at play besides wash sales. Here's my understanding, but it'd be great if someone with more experience could weigh in.

    For tax purposes the entire set of position is considered a straddle. Depending on your records, you might be able to treat the box spreads as separate identified straddles, which will work to your favor. They need to be identified on the day the position was opened. There isn't anything specific about what record keeping is required, but the wording for identified netting transactions suggests it can be pretty loose.

    The most relevant section of Publication 550 to look at is "Coordination of Loss Deferral Rules and Wash Sale Rules," particularly Example 3. It looks like the application of the rules applies to the individual positions independently. Rule 2 is pretty brutal: you have to recognize gains, while realized losses are first offset against any open positions with gains by increasing the basis, regardless of any open positions with losses. Suppose you have $100 realized gains, $100 realized losses, $50 unrealized gains, and $50 unrealized losses. Then you would recognize a gain of $100 and loss of $50, and have $50 of unrealized losses for next year. This is regardless of whether the open positions are substantially identical or sold within a 30 day window.

    In your case, you can avoid Rule 2 if you have identified straddles. However, Rule 1 concerning wash sales still applies to the individual positions. My understanding is that deep in-the-money options are substantially identical.

    There are a couple other relevant rules:

    The long call/short put pairs are a constructive ownership transaction, or possibly the entire box spread is a conversion transaction. With either treatment, a portion of your gains will be treated as ordinary income rather than capital gains.

    For straddles, expenses such as margin interest and short stock borrow fees are added to your basis rather than deducted on Schedule A from ordinary income. See "Interest expense and carrying charges on straddles."