Getting Around the Wash-Sale Rule

[MikeL]

40 minutes ago, aws said:

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. 

 

 

 

 

 

I am in Canada, I wonder if what you said apply to Canadian tax rule or not. 

[aws]

2 minutes ago, MikeL said:

I am in Canada, I wonder if what you said apply to Canadian tax rule or not. 

I know nothing of Canadian tax law, sorry.

[Spekulatius]

5 minutes ago, MikeL said:

I am in Canada, I wonder if what you said apply to Canadian tax rule or not. 

I have no idea. I have enough to worry about getting my US taxes right. Obviously, tax laws differ from country to country.

Edited October 13, 2021 by Spekulatius

[lnofeisone]

2 hours ago, Mephistopheles said:

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.

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

[Mephistopheles]

4 minutes ago, lnofeisone said:

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

Well the name "sale" is in the term "wash sale" so that should be a good hint. 

 

But since you asked-

 

From Publication 550:

 

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

 

1. Buy substantially identical stock or securities,

2. Acquire substantially identical stock or securities in a fully taxable trade,

3. Acquire a contract or option to buy substantially identical stock or securities, or

4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

[lnofeisone]

2 hours ago, aws said:

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

 

 

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. 

[lnofeisone]

6 minutes ago, Mephistopheles said:

Well the name "sale" is in the term "wash sale" so that should be a good hint. 

 

But since you asked-

 

From Publication 550:

 

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

 

1. Buy substantially identical stock or securities,

2. Acquire substantially identical stock or securities in a fully taxable trade,

3. Acquire a contract or option to buy substantially identical stock or securities, or

4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

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

 

Edited October 13, 2021 by lnofeisone

[aws]

Any of the doctrines of substance over form, step transaction, or sham transactions would make the whole thing fall apart if under audit, even if each individual transaction would appear to work. There's other ways to accomplish the same thing that also wouldn't work if examined:

 

For example, if I owned 30k worth of stock that dropped to 15k. I could sell that stock, gift the 15k to my brother, he could buy the stock in his name, and then gift the stock back to me. Now I have the shares with the lower basis (his cost) and a tax loss. All transactions are below the annual gift limits so they are not even reportable, and each on their own is a perfectly fine thing to do, but together they are not allowed.

 

 

 

 

 

 

 

[lnofeisone]

3 minutes ago, aws said:

Any of the doctrines of substance over form, step transaction, or sham transactions would make the whole thing fall apart if under audit, even if each individual transaction would appear to work. There's other ways to accomplish the same thing that also wouldn't work if examined:

 

For example, if I owned 30k worth of stock that dropped to 15k. I could sell that stock, gift the 15k to my brother, he could buy the stock in his name, and then gift the stock back to me. Now I have the shares with the lower basis (his cost) and a tax loss. All transactions are below the annual gift limits so they are not even reportable, and each on their own is a perfectly fine thing to do, but together they are not allowed.

 

 

 

 

 

 

 

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."

[Mephistopheles]

7 minutes ago, lnofeisone said:

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

 

Sure it does. The wording says "sales of stock or securities"

The call in step 4 would be considered a "security"

 

Edited October 13, 2021 by Mephistopheles

[ERICOPOLY]

18 minutes ago, Mephistopheles said:

Sure it does. The wording says "sales of stock or securities"

The call in step 4 would be considered a "security"

 

yup

[ERICOPOLY]

Perhaps the Deloitte reference was originally intended to address a circumstance of buying calls as a transaction that closes out existing covered calls.

[lnofeisone]

42 minutes ago, Mephistopheles said:

Sure it does. The wording says "sales of stock or securities"

The call in step 4 would be considered a "security"

 

1. Buy substantially identical stock or securities,

2. Acquire substantially identical stock or securities in a fully taxable trade,

3. Acquire a contract or option to buy substantially identical stock or securities, or

4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

 

The issue is not stock or securities. Step 4 is a sale of a call so no it doesn't. There is nothing here about sale of a stock/call/security. 

 

Anyway, how about we close this one. There is no $ to be made here. This is a legally valid strategy to bypass wash sale but an impermissible transaction (as aws said "substance over form") because you are reaping a tax benefit without changing an economic profile (I did tell you early on that this violates the spirit of the law). Any revenue agent worth their salt will call it as that (though I do wonder if they would see something like this if you just give a sheet of all the transactions). 

 

[ERICOPOLY]

5 minutes ago, lnofeisone said:

Step 4 is a sale of a call so no it doesn't.

 

....

 

This is a legally valid strategy

 

 

Not closing it out with those statements.

 

A sale of a call for a loss replaced with common stock is a wash.  Period.

[Mephistopheles]

Can't figure out if you are trolling or not, or if you think that options are not considered securities.

[lnofeisone]

5 minutes ago, Mephistopheles said:

Can't figure out if you are trolling or not, or if you think that options are not considered securities.

I'm not trolling nor am I saying that options are not securities. What I am pointing you to is the fact that everything in what you posted says "acquire" and the 4th step of what I posted is a sale. 

[ERICOPOLY]

5 minutes ago, lnofeisone said:

I'm not trolling nor am I saying that options are not securities. What I am pointing you to is the fact that everything in what you posted says "acquire" and the 4th step of what I posted is a sale. 

 

And that sale in the 4th step is the wash sale.

[Mephistopheles]

 

 

And that sale is referenced in Publication 550, from which I'll post again:

 

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

 

1. Buy substantially identical stock or securities,

2. Acquire substantially identical stock or securities in a fully taxable trade,

3. Acquire a contract or option to buy substantially identical stock or securities, or

4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

 

25 minutes ago, lnofeisone said:

I'm not trolling nor am I saying that options are not securities. What I am pointing you to is the fact that everything in what you posted says "acquire" and the 4th step of what I posted is a sale. 

 

For something to be a wash sale, there has to be a sale, you get that right? 

[lnofeisone]

2 minutes ago, Mephistopheles said:

 

 

 

For something to be a wash sale, there has to be a sale, you get that right? 

Repeating one last time. If you don't get it, you don't get it. It's fine. 

 

1) Sell your stock at a loss (say you lost $10/share) <--applies to this sale

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 to this sale

 

Honestly, we are now walking in circles and I'm going to call it a day. 

[ERICOPOLY]

Two amendments may bring the board into agreement:

 

1.   Sell stock at a loss

2.   buy calls that are far out of the money so they'll cost mere pennies

3.   Buy shares back 

4.   Wait 31 days

5.   Sell calls and take the loss

 

 

[ERICOPOLY]

Instead of pointing out what was wrong I thought it better to offer an amended form that resolves the issue.

[ERICOPOLY]

If you buy the calls for 1 penny per underlying share and if you had a $15 loss in the shares, you'll harvest a tax loss of $15.01 per share.

[ERICOPOLY]

Check with a CPA to verify my words because I'm not a tax expert by any means.

 

[ERICOPOLY]

One thing to verify is whether a far-out-of the-money option is "substantially equal".  I saw it mentioned in the NASDAQ article that a purchase of all calls of any strike will trigger the wash rule.

 

quoting:

"In a put sale, the government will declare a wash sale when the put position is substantially identical to the stock – that is, when there is a high likelihood that the put will be exercised (unlike the call purchase rule that damns any call purchase)."

Edited October 14, 2021 by ERICOPOLY

[ERICOPOLY]

I would not use it myself.  Looks like a sham.