lnofeisone

100% agree. Hence I made this comment earlier on "Does this violate the letter of the law, likely not. Spirit of the law, absolutely. But you did ask how to avoid a wash sale rule."

Again, what you are highlighting applies to step 1 not 4. 1) Sell your stock at a loss (say you lost $10/share) <--applies here 2) Buy a call option - you can buy a deep in the money call (say, $15). You have now triggered a washsale. Meaning you can't take a loss on your stock but your cost basis for the call has gone up to $25/share. 3) Buy your stock back 4) Sell the call at a loss <-- doesn't apply here

This is the most logical argument you can make against the trade. There was no economic risk incurred while having a tax benefit. The sequence of steps is not illegal (reminds me of son of boss abusive shelter from the 90s) and would result in a tax benefit.The covered call was a parallel that I drew but everyone just clung on to it for dear life.

Can you please point me to where the statute addresses a sale of call/stock being part of a wash sale?

JRM's comment x1,000. Hilarious and on point.

If you are going to make it personal, @ERICOPOLY, at least know what gaslighting means. As far as the wash sale, I showed you ambiguity in the language of the USC and IRS. Not urging you to utilize it but the ambiguity is there. Not really interested in making this another FNMA thread.

Also, the statute says absolutely nothing about a sale of a call being a wash sale. This is what this whole thing is predicated on.

You have a mismatch. You have more shares and securities bought than sold. How do you reconcile this? https://www.irs.gov/pub/irs-pdf/p550.pdf More or less stock bought than sold. If the number of shares of substantially identical stock or securities you buy within 30 days before or after the sale is either more or less than the number of shares you sold, you must determine the particular shares to which the wash sale rules apply. You do this by matching the shares bought with an equal number of the shares sold. Match the shares bought in the same order that you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.

Fair enough. Though this is not the first I've heard of this particular nuance. I had some time to dig in and find the actual relevant sections. The language is clear that the wash sale is triggered only when you buy the security/option to replace the security you sell. Wash sale doesn't get triggered when you sell options. You also have to match the shares you sold with the options you bought (hence substantially identical). Since you would be buying additional 1,000 shares, you are mismatching and the wall loss is not triggered. A synonymous transaction would be: Hold 1,000 shares Sell 500 shares Buy 2,000 shares (for a second imagine that this got traded as 500 share lot and a 1,500 share lot) -> at this point only 500 shares triggered a wash sale. The remaining 2,000 (original 500 that weren't sold and the new 1,500 share lot) shares are in the clear and have been untouched. https://www.law.cornell.edu/uscode/text/26/1091. "(a)Disallowance of loss deduction In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under section 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business. For purposes of this section, the term “stock or securities” shall, except as provided in regulations, include contracts or options to acquire or sell stock or securities." Now going back to the original example I gave: 0) You are holding your stock 1) Sell your stock at a loss (say you lost $10/share) 2) Buy a call option - you can buy a deep in the money call (say, $15). You have now triggered a washsale. Meaning you can't take a loss on your stock but your cost basis for the call has gone up to $25/share. 3) Buy your stock back -> these shares are brand new shares and are not touched by the wash sale. 4) Sell the call at a loss -> selling of this call is not a wash sale transaction. What are you buying/replacing? That's just closing out of a transaction that was impacted by a wash sale.

I find it just a tad bit curious that nobody has made a case against a Deloitte tax partner's assertion which is similar to what I said. Here is a professional in a big 4 accounting firm with a CPA. You'd think that individual would get more credit. Nonetheless, I do appreciate everyone's input. One of my favorite things to do is deconstructing trades like this one (Pandora papers anyone ?). My position is that IRS's language is ambiguous and not clear at minimum and the whole transitive property idea of a wash sale is nowhere to be found. It doesn't actually matter if the transaction is a covered call or not. What matters is that selling a call for a loss and buying a stock doesn't trigger a wash sale. @johnpane@boilermaker75 - can you please point me to somewhere where I can read that definition of writing a call means that I'm starting with 0 call position? I think what you meant to say is that "sell to close" a call is not the same as "writing a call." But let's have it your way and do a thought exercise. Imagine you did this simultaneously across two brokerage accounts. Account 1: Had 1,000 shares --> sold 1,000 shares Had 0 calls --> bought 10 calls Account 2 Had 0 shares --> bought 1,000 shares Had 0 calls --> wrote 10 calls On net basis, I am long 1,000 shares. In account two, I am a call writer. Now I am fully compliant with IRS code?

The piece of paper you are referencing is called a Private Letter Ruling (and you don't need it to to deal with IRS - just ask Peter Thiel). PLR will likely cost you $38k in IRS fees alone and multiples of this in attorney fees. I can give you a few recs, if you are interested. I'm not that vested into this argument.

Ok - here is the key premise that I think is missing: "Selling a call and buying a stock doesn't trigger a wash sale. Here is another para from IRS code on matching your first shares that would be sold to a purchase of calls: "More or less stock bought than sold. If the number of shares of substantially identical stock or securities you buy within 30 days before or after the sale is either more or less than the number of shares you sold, you must determine the particular shares to which the wash sale rules apply. You do this by matching the shares bought with an equal number of the shares sold. Match the shares bought in the same order that you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules" So if you have 1,000 shares and sell them and then buy 10 calls - that's matched and wash sale applies to that, i.e., if you hold the calls, you have to defer the loss until you sell the calls. Agreed. The next purchase of 1,000 shares is not matched to anything. You effectively doubled down because these are not offsetting positions and wash sale rule is not triggered (you are long 10 calls, long 1,000). You then sell the calls. This sale becomes covered call sale and this paragraph of the code applies. Note it says absolutely nothing about what kind of calls they are, when they were purchased, look forward/backward periods, or how you arrived at the cost basis. It also says absolutely nothing about you needing to be a -10 calls + 1,000 shares to have a qualifying covered call transaction (not position). "Capital loss on qualified covered call options. If you hold stock and you write a qualified covered call option on that stock with a strike price less than the applicable stock price, treat any loss from the option as long-term capital loss if, at the time the loss was realized, gain on the sale or exchange of the stock would be treated as long-term capital gain. The holding period of the stock does not include any period during which you are the writer of the option." --> "Selling a call and buying a stock doesn't trigger a wash sale. Honestly, show me one example, that is not your opinion or interpretation of the IRS Code, of a direct example from IRS Code or, at this point, anywhere on the web that agrees with your position on double wash rule with a pathway I laid out. The light search I've done only shows a single transactions and (as Spek succinctly put it) doesn't consider a path dependency (which I believe IRS didn't consider when writing this reg). Edited for clarity.

Ok - deem yourself to have closed an option in step (2) and take the loss. The 2nd lot of shares is still untouched by the wash sale and basis step up doesn't apply.

This is not a garden variety transaction. So a "garden variety" wash sale rule doesn't apply. The IRS publication (the very thing that you can point to when you get examined) say so. A tax partner say so. An opinion (albeit logical but the tax code is not a logical being) on a message board gets weighted appropriately. I'm going to drop this because it's a waste of time for me to walk in circles while there is no new information that disputes the IRS publication and the link I provided.

That's what I thought the issues is. The end result is that there is no covered call (that's the position you are arguing and I agree). What I am saying is that the transaction that had to occur to get me from 1,000 shares to 700 shares + 3 calls is mathematically equivalent to selling covered calls. Now if you go to my original example: You would start with 1,000 shares. 1) You would sell all your shares 2) You would buy equivalent amount of calls The net result is that you have no covered calls ad you are net long 10 calls. The transaction to get you there was a sale of 10 of covered calls. That's how IRS views it. This is the very likely reason the Deloitte partner has recommended that as an approach. So in order of operations: 0) I bought 1,000 shares 1) I sold 1,000 shares --> I can take a loss 2) I bought identical instrument, e.g., deep ITM calls --> I now can't take a loss as I triggered a wash sale. The call basis is now stepped up 3) I bought 1,000 shares --> these shares are not related and are not impacted by what I did in 0, 1, or 2. The cost basis of these shares are not stepped up. 4) I sell the calls --> I can now take the loss on the calls with stepped up basis

I think I see the disconnect. Sell: 300 shares Buy: 3 calls You view this as sell 3 covered calls. Start: 1,000 shares Sell: 300 shares Buy: 3 calls You don't view this as start with 1,000 shares and sell 3 covered calls?

A covered call is one short position (sell stock at loss - step 1 above) paired with one long position (buy a call - step 2 above). How do you view this as a long position?

From earlier post: 1) Sell your stock at a loss (say you lost $10/share) 2) Buy a call option - you can buy a deep in the money call (say, $15). You have now triggered a washsale. Meaning you can't take a loss on your stock but your cost basis for the call has gone up to $25/share. 3) Buy your stock back 4) Sell the call at a loss If you do (1 and 2) that's selling a covered call. If you do (3 and 4) that's buying a covered call. In either case you are except from loss deferral.

Nice red herring there. That's why I said 1) sell the stock 2) buy the calls. Those two steps constitute a covered call transaction (sell side of it). In either case, that transactions triggers a wash sale and subsequent purchases are fine. IRS publication provides 0 evidence to the contrary. A Deloitte partner says so. I'm open to evidence of the contrary.

@ERICOPOLY @Mephistopheles I realize that it may feel intuitive and very logical to assume this but that's just not how the tax code is written. In essence, the second transaction creates a covered call and is excepted from loss deferral rules. Furthermore, the 2nd purchase doesn't constitute a successor position and thus not a wash sale by definition. I guess the one addendum to the calls argument I would make is to make sure you have qualified covered calls. Here is an actual IRS publication: https://www.irs.gov/pub/irs-pdf/p550.pdf Page 59 "Exceptions. The loss deferral rules do not apply to: 1. Positions established after October 21, 2004, comprising an identified straddle; 2. Certain straddles consisting of qualified covered call options and the stock to be purchased under the options;" The second purchase of a lot doesn't meet the requirement of a successor position as it fails to meet both requirements (page 60 - Successor Position).

Does anyone have an official IRS Guidance they can provide? I've read that one a lot and never seen a transitive property that's being suggested. Also: "However, the government states that the sale of an equity and the purchase of a call option on that equity does actually trigger a wash sale. Ironically selling a call for a loss and then buying the underlying stock does not." and " A partner at Deloitte suggested to us a three-step process to take a loss while not substantially disturbing alpha. Step 1: Sell XYZ for a $15 loss. Step 2: Buy the call option for $3. Step 3: Buy back the stock." https://www.nasdaq.com/articles/strategies-help-clients-around-wash-sale-rule-2015-11-10 Edit for grammar and another pertinent paragraph.

No. You need the calls to capture the loss and tied up your first lot to the calls. The question will be related to the calls (substantially identical security) and not the second lot. The fool.com article doesn't conflict with this.

Do you have any Do you have any IRS publications to back this up? I have never heard of wash sale rules have transitive properties like that.

No. The shares you are holding now, if you match them exactly to your options (so say you have 300 shares that you sell and you buy 3 calls), that's a wash sale. Once you sell your calls, you get your loss. Buying a new lot of shares doesn't tie your new shares to your old shares. Your calls have already done that. This is almost the same as doubling down. There is nothing in the IRS docs that I've seen that contradicts this. If anyone knows, do let me know. If you want, try simulating this transaction in the TurboTax and see what happens. Does this violate the letter of the law, likely not. Spirit of the law, absolutely. But you did ask how to avoid a wash sale rule .

The strategy pupil is describing is called doubling down. There is another strategy (this isn't a recommendation, please verify with your CPA and do your homework ) 1) Sell your stock at a loss (say you lost $10/share) 2) Buy a call option - you can buy a deep in the money call (say, $15). You have now triggered a washsale. Meaning you can't take a loss on your stock but your cost basis for the call has gone up to $25/share. 3) Buy your stock back 4) Sell the call at a loss This is a way to keep your shares and keeping your loss. The biggest disadvantage of this strategy is matching your tax rate (i.e., it's not idea if you held a stock for more than a year).