I have a few long stock positions that are in the red and that I don't expect will recover this year (KR, GE, T, SLB, etc.), but I want to maintain my exposure. If I sell deep ITM puts on these to receive a credit and then sell the stock to generate a loss, will that avoid the IRS wash-sale rule? The credit should not be considered a gain until the trade is closed. I'm interested in realizing losses to offset my realized gains and reduce my tax liability for this year, but still want to maintain exposure to upside.
Use the short put premium received and purchase otm call for synthetic long a few months out. You should contact your CPA for exact tax advise. But you should be good to go...
Textbook wash sale violation. Wash Sales You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities. A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: Buy substantially identical stock or securities, Acquire substantially identical stock or securities in a fully taxable trade, Acquire a contract or option to buy substantially identical stock or securities, or Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale. If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold.
Sell a deep ITM put will be considered a wash sale by the IRS. IRS requires that you sell a put that has a substantial likelihood it will expire unexercised. A deep ITM will most likely be exercised before expiration so it is considered a substantially identical stock or securities. Best to sell and wait 31 days before repurchase.
Brokers don't "enforce" wash sale rules, if by that you mean: prevent you from trading. As to "would it appear as..." -- that's software/broker dependent, but regardless you can file as you wish. The software/broker's reports are a suggestion. They aren't infallible.
Your post says you don't expect them to recover this year. You can wait 31 days and then simply replace the positions. Brokerage software has gotten pretty good and there is a very chance they will pick it and report it as a wash sale if you turn around and sell the puts. It's kind of the classic question " will I get caught"? Very likely and the IRS has made this a focus.
Earlier this year, I had asked my accountant if selling IBB (which at the time was a loss) and buying an equal amount of XBI would count as a wash sale. His response was no because they are different instruments. If that's true, then it's actually pretty easy to defer tax gains by jumping between ETFs that trade very similar. Taking things a step further, I considered replacing long stock with deep ITM short puts. Has anyone actually done this to successfully defer losses? How far does the IRS go? There is a huge gray area. For example, I can sell 100 shares of AAPL at a loss and buy 100 shares of QQQ without incurring a wash sale even though AAPL is a significant component of QQQ. Part of that new position includes the exact same shares that I sold at a loss, but yet I have no wash sale. How about options? If I close a long shorter-duration call at a loss, but then immediately buy a longer-duration, same strike, same underlying call, will I incur a wash sale on the transaction? Pretty sure that has never happened to me. Meant to say "fully recover". I expect all positions to partially recover by the end of the year otherwise I would have simply sold them. KR for example I expect to be higher by the end of the year and want to maintain my exposure. Not really, it's legal to structure one's business in order to minimize taxes to the greatest extent possible. Robo-advisers are known for tax-loss harvesting algorithms that sell one asset and replace with a similar for the exact intent of deferring gains into the future. So my question is one of legality, not tax evasion. If I was interested in tax evasion, there are easier methods (Bitcoin).
If you really want to take the losses this year, you can do it with call options. What you do is sell the stocks for a loss and buy a cheap short term call option. Next day, buy back the stocks you sold. On the following day sell the call option for a loss. This loss can be deducted because the call option purchase is a wash sell. Your loss is the cost of the call option plus the stock loss. The additional stock purchase is considered a new security transaction.