Getting Around the Wash-Sale Rule

[thepupil]

On 10/9/2021 at 7:07 AM, thepupil said:

you'r in luck in that it's october, so as long as it fits w/i your risk tolerance, the simplest thing to do is 

 

buy more on October 11th

Sell your specific high cost basis shares on November 12th or later, realizing a loss. 

 

bonus step: buy more December 13th or later once the procrastinators start tax loss selling

additional nuance: if you can, try to double down in your tax deferred account, so your high basis shares on in your taxable and low basis are in your IRA

 

for 30 days you'll be doubly exposed. If this is too much risk or you feel that you're letting the tax tail wag the investment dog, then you could double down, but also do a collar (on half the shares) to reduce risk (such as sell a 20% OTM call and buy a 30% OTM put. to avoid constructive sale, I recommend a pretty wide band on the collar

https://www.nysscpa.org/news/publications/the-trusted-professional/article/tools-techniques-to-shield-and-defer-taxes-on-unrealized-stock-gains

 

 

fun discussion.

 

repeat prior recommendation. 

[ERICOPOLY]

The IRS is quite clear that if you purchase a replacement position within 30 days of selling at a loss it's a wash sale.  Therefore, it's a wash sale.

[boilermaker75]

1 hour ago, johnpane said:

Selling a call you hold is not "writing a call", thus not "writing a covered call", thus not "writing a qualified covered call". Your whole argument rests on a section of Pub 550 that does not apply to the situation.

 

 

Exactly. When you write a call, you are creating a call that did not exist. Like writing an insurance policy. You get the premium and someone else gets the call (policy). 

[lnofeisone]

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?

[thepupil]

honestly, I've read what you have written a few times and fail to understand your argument.

 

It'd be like if you were stating an opinion in a different language where i had 4th grade level comprehension. What I do understand sounds very much like a wash sale, but I don't understand enough of what you are saying to really argue with you. 

 

What i do know is that I've done my above method to maintain positions while harvesting tax losses with success many times (and not triggered wash sales per Fidelity/IBKR/turbotax). 

 

Generally as long as one 

1) waits 30 days before/after

2) doesn't do anything hedge wise that's too close to a totally de-risking event

 

you can avoid wash sale. Specific share allotment is key (which i heard they may be trying to get rid of)

[johnpane]

14 minutes ago, lnofeisone said:

nobody has made a case against a Deloitte tax partner's assertion

 

An article, written 6 years ago and not attributed to any author, claims that an unnamed "partner at Deloitte" "suggested" a 3 step process. (Note the three steps do not include selling the call, so essentially amount to doubling down. It is apparently the author -- not the claimed Deloitte partner --who mentions selling the call to harvest the loss and does not say when). 

 

This could be completely made up, or the person might have retracted the suggestion. You can't believe everything you read on the internet.

Edited October 13, 2021 by johnpane

[lnofeisone]

8 minutes ago, johnpane said:

 

An article, written 6 years ago and not attributed to any author, claims that an unnamed "partner at Deloitte" "suggested something". 

 

This could be completely made up, or the person might have retracted the suggestion. You can't believe everything you read on the internet.

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. 

 

 

Edited October 13, 2021 by lnofeisone

[johnpane]

6 minutes ago, lnofeisone said:

selling of this call is not a wash sale transaction. What are you buying/replacing?

You bought stock in step 3, within 30 days before this sale. It is as simple as that.

[lnofeisone]

4 minutes ago, johnpane said:

You bought stock in step 3, within 30 days before this sale. It is as simple as that.

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.

 

 

Edited October 13, 2021 by lnofeisone

[lnofeisone]

4 minutes ago, johnpane said:

You bought stock in step 3, within 30 days before this sale. It is as simple as that.

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.

[ERICOPOLY]

I wonder how gaslighting the IRS about the definition of "covered call" will go for you.

[Fitz]

Interesting discussion, but I’m with Eric. 
 

Reminds me of Buffett’s quote at Salomon: “if what your legally allowed to do is the boundary lines of a football field, stay between the hashmarks” 

 

Above strategies could probably work, but could also cause some unnecessary headaches. 

[ERICOPOLY]

Buffett sold the Wells Fargo shares.  One cannot claim that he shorted the Wells Fargo shares.  He sold shares that he owns.  That's not what shorting is.

 

That's how ridiculous the argument looks.

[lnofeisone]

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. 

 

[ERICOPOLY]

That's what gaslighting is, if you want to make t personal.  And now you can add projection too.

[ERICOPOLY]

The IRS specifically said "covered call".  You don't have one.

[ERICOPOLY]

Why not quote sections related to short sales and use those rules whenever you sell stock if the rules fit your agenda?

 

1.  Buy stock

2.  Sell stock.

 

If you ignore step 1, you have a short sale.  So it's "mathematically identical" to a short sale beginning after step 1.  So use the short selling rules.

[ERICOPOLY]

The reason I called it gaslighting is that the argument rests on denying the objective reality that no covered call exists.  That isn't personal.

[Mephistopheles]

16 hours ago, lnofeisone said:

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.

 

 

You reconcile it by pairing the amount sold with the amount bought and ignoring the rest.

So if you sold 100 shares at a loss and then buy 150 shares, 100 shares from the latter transaction gets paired with the 100 you sold at a loss. 

 

16 hours ago, lnofeisone said:

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.

But it does. It clearly says options and stock is substantially similar. So, for this purpose it doesn't matter whether you are generating the loss from the sale of a call position or sale of stock. You also know that the 30 days is forward and backward looking.

 

And it's not a covered call. It's a sell to close transaction by your own words. You're closing off a long call position. So I'm not sure what the confusion is?

 

16 hours ago, lnofeisone said:

 

 

 

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. 

 

 

 

Edited October 13, 2021 by Mephistopheles

[aws]

There's a lot of posts I'm not sure I want to read here, but from skimming it seems like the whole argument about whether this situation is a covered call is kind of missing the point. We are all in agreement that it is fine if you double down on a stock in a losing position, wait 31 days, then sell the high basis stock for a loss and keep the low basis shares. The proposed transaction of buying a call option plus the long stock is essentially also doubling your long position, and it should open up an opportunity for tax loss harvesting just like if you bought more of the stock. So if the call option is considered substantially identical to the original shares, then I see no reason why it wouldn't work.

 

Using the deep in the money call example, every scenario after 31 days is exactly the same as if you just doubled your position with shares, with the exception of if the stock dropped so far that the deep ITM call was now OTM and you did not exercise. So there's that tiny chance of an upside, but you also pay a tiny premium there so it's not really a huge advantage.

 

If you used ATM or OTM calls then you are risking much less to double your position, and you may have a more efficient way of doubling your position, but you also pay a higher option premium to do so and if it's far OTM you risk it no longer qualifying as a substantially identical position. 

 

 

 

 

 

 

Edited October 13, 2021 by aws

[MikeL]

shouldn't ACB be used for capital gain/loss calculation in this scenario?

Quote

We are all in agreement that it is fine if you double down on a stock in a losing position, wait 31 days, then sell the high basis stock for a loss and keep the low basis shares

 

[Spekulatius]

Anyone tried Turbotaxing the sequence? Turbotax is the ultimate tax authority. LOL.

2 minutes ago, MikeL said:

shouldn't ACB be used for capital gain/loss calculation in this scenario?

 

 

2 minutes ago, MikeL said:

shouldn't ACB be used for capital gain/loss calculation in this scenario?

 

With many brokers (Wells Fargo, Fidelity) , you can sell specific lots. It is some what hidden in Fidelity, but the functionality is there. I think IBKR has this functionality too, although i have never found or used it in the mobile app (which is what I am using).

[aws]

I'm not sure what you mean. If ACB is adjusted cost basis, then there is no adjusted cost basis in this scenario as by waiting 31 days you avoided the wash sale adjustment entirely. 

 

 

 

 

 

[aws]

I see now that the discussion is more about whether you can skip the 31 day hold period with this strategy. That I am much more skeptical about and I'd really like to see the original suggestion by the Deloitte partner, as I suspect some important details may have been omitted by the article author. If I were an IRS agent and I were auditing someone who:

 

1. Sold stock for a loss

2. Bought a call option to trigger a wash sale

3. Immediately sold the call option to lock in the loss

4. Bought back the stock the same or next day and claimed a fresh cost basis

 

I would invoke substance over form and say there was no real sale and no loss is allowed.

 

 

Edited October 13, 2021 by aws

[thepupil]

20 minutes ago, aws said:

I see now that the discussion is more about whether you can skip the 31 day hold period with this strategy. That I am much more skeptical about and I'd really like to see the original suggestion by the Deloitte partner, as I suspect some important details may have been omitted by the article author. If I were an IRS agent and I were auditing someone who:

 

1. Sold stock for a loss

2. Bought a call option to trigger a wash sale

3. Immediately sold the call option to lock in the loss

4. Bought back the stock the same or next day and claimed a fresh cost basis

 

I would invoke substance over form and say there was no real sale and no loss is allowed.

 

 

AGREED!