Getting Around the Wash-Sale Rule

[thepupil]

40 minutes ago, ERICOPOLY said:

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)."

 

 

Very interesting! I thought sufficiently OTM call options were fine (and had even linked an article that said a collar with a 20% band was kosher)

[ERICOPOLY]

4 minutes ago, thepupil said:

 

 

Very interesting! I thought sufficiently OTM call options were fine (and had even linked an article that said a collar with a 20% band was kosher)

 

I feel that anything in that article needs to be examined closely because the editor didn't catch the error of omission in not waiting 31 days before selling the adjusted call for a loss.  So, where there is one cockroach there may be more.

 

 

Edited October 14, 2021 by ERICOPOLY

[ERICOPOLY]

Additionally, the article you linked was about a collar and in the collar you are writing the call options, whereas this quote from the NASDAQ article is specifically about purchasing call options.

Edited October 14, 2021 by ERICOPOLY

[thepupil]

Yea was referring to this article which wasn’t directly dealing with wash sale m, but rather “constructive sale” 

 

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

 

 

[ERICOPOLY]

And also one was constructive sale rules and one is wash sale rules.

 

But in both cases they seem to agree that sufficiently out of the money puts don't cause issues.

[ERICOPOLY]

Just now, thepupil said:

Yea was referring to this article which wasn’t directly dealing with wash sale m, but rather “constructive sale” 

 

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

 

 

 

Looks like my last post crosses paths.  I remember your posting that article and I'm familiar with it because I also posted a link to that article in the past few months.

 

 

[Spekulatius]

I don't understand the animosity towards @lnofeisone . This may or may  not work. It was meant as loophole and that's possibly what it is, so why the hostility. No one is forced to use this trick. 

 

Has anyone run a Turbotax test? That's the ultimate tax authority  for me  since I am just a peon and do my taxes in TT. If TT says yes, I would be good to go.

Edited October 14, 2021 by Spekulatius

[aws]

I'm not sure how serious you are being, but obviously Turbotax would not catch something like this which may not even be reported anywhere in your tax documents. If you sold your shares in one account and bought them back immediately in another account, your broker wouldn't report that as a wash sale as they wouldn't know the purchase happened, and since it's not in your tax documents it wouldn't be picked up by Turbotax.

 

 

 

[Mephistopheles]

48 minutes ago, Spekulatius said:

I don't understand the animosity towards @lnofeisone . This may or may  not work. It was meant as loophole and that's possibly what it is, so why the hostility. No one is forced to use this trick. 

 

Has anyone run a Turbotax test? That's the ultimate tax authority  for me  since I am just a peon and do my taxes in TT. If TT says yes, I would be good to go.

 

No animosity from me. It was a back and forth on the claims presented.

 

Edit: And I love avoiding taxes as much as everyone else here. So I'd love to be wrong on the argument. But I simply find the argument flawed, as do Eric and others. 

Edited October 14, 2021 by Mephistopheles

[Spekulatius]

29 minutes ago, Mephistopheles said:

 

No animosity from me. It was a back and forth on the claims presented.

 

Edit: And I love avoiding taxes as much as everyone else here. So I'd love to be wrong on the argument. But I simply find the argument flawed, as do Eric and others. 

Well, I won't do this either, seems to complicated to me. I would just go with either  doubling down for a month or a replacement  stock/ETF (dirty hedge) for a month , if I feel uncomfortable with the risk of doubling down. Besides that, I don't have too many losses this year anyways and most are in IRA's.

Edited October 14, 2021 by Spekulatius

[ERICOPOLY]

1 hour ago, Spekulatius said:

I don't understand the animosity towards @lnofeisone . This may or may  not work. It was meant as loophole and that's possibly what it is, so why the hostility. No one is forced to use this trick. 

 

Has anyone run a Turbotax test? That's the ultimate tax authority  for me  since I am just a peon and do my taxes in TT. If TT says yes, I would be good to go.

 

I am in the camp that the editor should have corrected the article to specify WHEN the calls can be sold.  It is left to the reader to make assumptions.  Someone who doesn't understand the 31 day waiting period will get snared by a second wash sale.  I believe Deloitte was only suggesting to move the capital loss into a tearoff stub (the call).

 

Get rid of the loss as if one is taking out the garbage (use a call as the garbage bag).

Edited October 14, 2021 by ERICOPOLY

[ERICOPOLY]

The NASDAQ article does not make any claim whatsoever about a magic 31 day waiting period exception.

 

It doesn't make that claim anywhere!

 

If such a magic existed in the tax code, and if that was the intent of the article, surely they would have mentioned it at least one time.

Edited October 14, 2021 by ERICOPOLY

[ERICOPOLY]

It only makes a claim that the loss is moved into the calls.

[ERICOPOLY]

2 hours ago, Spekulatius said:

I don't understand the animosity towards @lnofeisone .

We have our own perceptions.  I saw someone making a snide remark about "at least understand the meaning of the word" while in the same breath saying "if you're going to make it personal", and then twice ending the conversation by restating his point (having the last word) and then asking everyone if the conversation can be wrapped up.  And the second iteration of this was prefaced with a statement that looked like "I've tried to explain it to you guys...  here is one final time I'll repeat myself and if you don't get it you don't get it... "  It was condescending was my viewpoint on that.

 

 

Edited October 14, 2021 by ERICOPOLY

[Mephistopheles]

29 minutes ago, ERICOPOLY said:

We have our own perceptions.  I saw someone making a snide remark about "at least understand the meaning of the word" while in the same breath saying "if you're going to make it personal", and then twice ending the conversation by restating his point (having the last word) and then asking everyone if the conversation can be wrapped up.  And the second iteration of this was prefaced with a statement that looked like "I've tried to explain it to you guys...  here is one final time I'll repeat myself and if you don't get it you don't get it... "  It was condescending was my viewpoint on that.

 

 

+1

 

If someone says the rules only apply to "acquisitions" not "sales" and then you point out where it says "sales" and then they revert back to it not applying to "sales of calls", the argument moves in circles. It's like that whack a mole game.

[lnofeisone]

On 10/13/2021 at 6:10 PM, Mephistopheles said:

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

Turns out options are not considered securities.  In fact, I was pointed to a specific court case where IRS lost because of that. It's a moot point for our discussion because of TAMRA (1988) but so you have it for your reference:   "In a Tax Court case, Gantner v. Commissioner (91 T.C. ... denied, 498 U.S. 921 (1990)), the court found that stock options were not securities for purposes of the wash sales rule."

[lnofeisone]

On 10/14/2021 at 11:58 AM, ERICOPOLY said:

We have our own perceptions.  I saw someone making a snide remark about "at least understand the meaning of the word" while in the same breath saying "if you're going to make it personal", and then twice ending the conversation by restating his point (having the last word) and then asking everyone if the conversation can be wrapped up.  And the second iteration of this was prefaced with a statement that looked like "I've tried to explain it to you guys...  here is one final time I'll repeat myself and if you don't get it you don't get it... "  It was condescending was my viewpoint on that.

 

 

Yes, we all have our perceptions. My perception was that your analysis lacked any serious depth, built on preconception that it's a simple issue, and lacking the appreciation of transaction complexities and nuances, backed by a barely a source (yes, fool.com is pop finance and qualifies as barely a source.). I can write all that off as having a discussion on a board but if you are going to pound that table strong, make sure you are not wrong. I assure you, you were not right. Trying to somehow change the subject and insinuate (borderline insult?) that I don't know what covered calls are is, both, disingenuous and hilarious. 

 

You assumed that I am would be gaslighting the IRS with my take on things. Even if we take your elementary understanding of the term "gaslighting" (which, and I'm going to take a leap of faith here, was not part of your vocabulary 10-15 years ago despite the age of the term):

 

1) Taxpayers have disagreements with IRS all the time. Until 1988, calls were not even considered securities and IRS lost. It's not gaslighting. It's disagreements. This is why we have courts. 

2) Gaslighting is typically done by the entity in power. I assure you, I have very limited power over the IRS other than knowing the little realm of my domain down to science. In fact, the power imbalance is the complete opposite. 

 

Having said all that, for education purposes, here is a paper by tax partners from Davis Polk (some would say it's a reasonably respectable law firm). Here are their names - Lucy Farr and Michael Farber. Both are current practicing tax partners. So no anonymity of a "Deloitte partner" on some blog on nasdaq.com Take a read to appreciate the history of the wash sales rules, current(ish, circa 2002) issues (e.g., swap), the loop holes that are big enough to drive a dump truck through that are wash sales rules. Most of them untested, unsettled, and inconsistent. That includes that strategy steps that I laid out (not directly but inferred). I am happy to email you a copy if you don't have a subscription. 

 

https://heinonline.org/HOL/LandingPage?handle=hein.journals/jrlfin3&div=31&id=&page=

 

3 J. Tax'n Fin. Products 41 (2002)
Dirty Linen: Airing out the Wash Sale Rules

 

Feel free to respond (or not) but please 1) keep it to a source that is not your opinion 2) civil. 

 

 

 

 

 

[ERICOPOLY]

3 hours ago, lnofeisone said:

 I assure you, you were not right

 

ROTFL

[hyten1]

here is a good paper on the topic especially the section "III. Perfect End-Runs Around the Wash Sale Regime"

 

https://scholarship.law.columbia.edu/cgi/viewcontent.cgi?article=3484&context=faculty_scholarship

 

there is definitely ambiquitiy within the law, thats why these so call loophole/workaround exist

 

you can either stick to the spirit of the law or attempt/apply these loopholes, thats what the discussion in this thread comes down to

 

 

 

 

 

Edited October 19, 2021 by hyten1

[lnofeisone]

On 10/13/2021 at 9:43 PM, ERICOPOLY said:

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 - sure, but this is irrelevant. Buying deep OTM just lowers your cost but since you will do this in one day. 

3.   Buy shares back 

4.   Wait 31 days - this is not needed. 

5.   Sell calls and take the loss

 

 

 

[lnofeisone]

13 hours ago, ERICOPOLY said:

 

ROTFL

Thanks for this well thought out comment. Really adds to the knowledge of the board.

 

I would encourage you to take a look at the article that @hyten1 posted. Scroll to page 25-26. Read the exact strategy I posted. So now you have two respectable sources that point to legal validity of the transaction. At what point do you concede? 

Edited October 19, 2021 by lnofeisone

[ERICOPOLY]

8 minutes ago, lnofeisone said:

Thanks for this well thought out comment. Really adds to the knowledge of the board.

 

I would encourage you to take a look at the article that @hyten1 posted. Scroll to page 25-26. Read the exact strategy I posted. So now you have two respectable sources that point to legal validity of the transaction. At what point do you concede? 

 

 

I was literally dying after having your assurances and then reading ahead to where you wrote "keep it to a source that is not your opinion".  Rules are for others but are not for you.  

[ERICOPOLY]

26 minutes ago, lnofeisone said:

 

page 29:

 

Of course, the loss would not be deductible if expiration of the option was itself a wash sale. Happily for the taxpayer, though, there are two reasons why Section 1091 seems not to apply when the option expires. First, the purchase of stock on November 2 is more than thirty-one days before the option expires (i.e., on December 11).62 Second, the stock in the new lot is not substantially identical to the option (i.e., since the option is out-of-the-money).6

 

https://scholarship.law.columbia.edu/cgi/viewcontent.cgi?article=3484&context=faculty_scholarship

Edited October 19, 2021 by ERICOPOLY

[ERICOPOLY]

These guys are picking and choosing here:  "Second, the stock in the new lot is not substantially identical to the option (i.e., since the option is out-of-the-money)."

 

cited from page 29:

https://scholarship.law.columbia.edu/cgi/viewcontent.cgi?article=3484&context=faculty_scholarship

 

I'm not sure how they're going to be convincing in an audit with that remark when it undermines their claim that the loss was transferred to the calls upon purchase of said calls which they later argue is not substantially identical because they are out-of-the-money.

 

They cannot have it both ways.

 

 

Edited October 19, 2021 by ERICOPOLY

[lnofeisone]

33 minutes ago, ERICOPOLY said:

page 29:

 

Of course, the loss would not be deductible if expiration of the option was itself a wash sale. Happily for the taxpayer, though, there are two reasons why Section 1091 seems not to apply when the option expires. First, the purchase of stock on November 2 is more than thirty-one days before the option expires (i.e., on December 11).62 Second, the stock in the new lot is not substantially identical to the option (i.e., since the option is out-of-the-money).6

 

https://scholarship.law.columbia.edu/cgi/viewcontent.cgi?article=3484&context=faculty_scholarship

Note that there is nothing about you needing to hold your options to expiry.  Footnote 62, sheds some light on that ambiguity.

 

What you are highlighting is another way to circumvent the wash sale rule.  You can also buy super cheap deep OTM calls that go 31+ days out and bypass the wash rules.

 

In either case, the taxpayer would be trying to gain a tax advantage at no substantial change of economic profile and any regulatory body will not look kindly on it. 

 

 

Edited October 19, 2021 by lnofeisone