Does wash sale apply to options?

Discussion in 'Options' started by a529612, Sep 21, 2007.

  1. Say you lost money on a long Sep option and you start another long Oct option with the same strike and the same underlying stock, is this considered as a wash sale? Thanks!
  2. I wouldn't think so, since September options and October options are different securities. You're not booking a loss on the same investment you continue to hold.

    Anyway, most of the time it shouldn't matter since you'll be out of both positions in the same tax year.

    To be certain, I'd consult the IRS or a good accountant.
  3. That makes sense, though. Exchanging a stock for a short put is the same as writing a covered call. If you'd sat on your shares and written the call, you wouldn't have had a tax-deductible loss. That's exactly the kind of chicanery the wash sale rule is designed to prevent.
  4. spindr0


    Losses on Options

    Congress amended the wash sale rule in 1988 so that it applies directly to contracts or options to buy or sell stock or securities. That means you can have a wash sale when you close an option position at a loss, if you establish a replacement position within the wash sale period. The Treasury has yet to issue regulations under this rule, and a host of questions remain unanswered. Foremost among these is the question of when one option is substantially identical to another option.

    Until the Treasury decides to issue regulations or other guidance, neither I nor anyone else can say exactly how the wash sale rule applies to losses on options. But there's a pretty good rule of thumb that should tell you when you're safe and when you're on thin ice. If the positions you acquired within the wash sale period permit you to participate in the same up and down market swings as the position that produced the loss, there's a chance the IRS will say you have a wash sale. If that's not the case, you should be safe.

    Suppose you've sold a call option at a loss. Buying another call option on the same stock within the wash sale period may be viewed as a wash sale even if the new call option has a different expiration or a different strike price. The IRS might assert that you have a wash sale if you buy XYZ stock, especially if the call was in the money when you sold it. Similarly, you could also have a wash sale if you write a deep-in-the-money put option during the wash sale period.

    By contrast, you shouldn't have a wash sale if you sell a call option at a loss and also write a put option that's at the money or out of the money. The long call option and the short put option are both bullish positions, but the short put option doesn't let you participate in the upside.

    These remarks are simply my interpretation, and won't necessarily reflect the interpretation of the IRS or the Treasury. What's more, other tax pros may have a different take on this question. Unfortunately, there's no sign that official guidance on these issues will be forthcoming in the near future.