Getting Around the Wash-Sale Rule

[lnofeisone]

6 minutes ago, ERICOPOLY said:

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.

 

 

I originally said deep ITM calls would be needed. That was wrong. ATM or OTM would be the way to go since both would fail the substantially identical test (delta != 1). 

[ERICOPOLY]

On 10/14/2021 at 9:29 AM, Mephistopheles said:

...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.

 

+1

[hyten1]

20 minutes ago, ERICOPOLY said:

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.

 

 

 

ERIC you are right, the law seemingly contridict itself, this is what someone told me from a CFO level guy at a hedge fund

 

Buying a call after within 30 days of selling a stock at a loss will trigger a wash sale,

however, having a call and expiring/selling at a loss and then buying a stock will not create a wash sale.

 

you would think it should work both ways, but apparently it doesn't! I obviously have never tried this

 

 

 

Edited October 19, 2021 by hyten1

[ERICOPOLY]

8 minutes ago, hyten1 said:

having a call and expiring/selling at a loss and then buying a stock will not create a wash sale.

 

They mention 31 days for what reason then?

 

 

[ERICOPOLY]

And prefaced with "Of course"

[ERICOPOLY]

59 minutes ago, hyten1 said:

 

ERIC you are right, the law seemingly contridict itself

 

No, I'm saying the authors seem to contradict themselves.  When they introduce the out-of-the-money strategy on page 27 they claim a wash sale occurs because a loss is taken on the shares and out-of-the-money options have been purchased.

 

But then on page 29 they argue against themselves, saying that out-of-the-money options are not "substantially identical" and don't trigger wash sales.

 

Edited October 19, 2021 by ERICOPOLY

[ERICOPOLY]

I'll point you directly to it:

 

"Happily for the taxpayer, though"... "the purchase of stock on November 2 is more than thirty-one days before the option expires"

 

page 29:

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

 

 

 

 

Edited October 19, 2021 by ERICOPOLY

[hyten1]

eric, i see, my point is that the law is not clear, if the following is true,

 

Buying a call after within 30 days of selling a stock at a loss will trigger a wash sale,

however, having a call and expiring/selling at a loss and then buying a stock will not create a wash sale.

 

you would think otherwise!!! but apparently it is.  i spoke to the CFO again, he said this is a well known way people get around the rules. I am not a lawyer so I am not sophisticated enough to read up all the laws and figure out why this is the case. 

 

on another note, just because a sophisticated investors does it doesn't mean it'll be easy for us, given most of us trade via Fidelity, Tdameritrade etc. not sure how their system handles these situations (will they match the sell of stock with the corresponding buy of OTM calls?) if their system doesn't handle it automatically you'll have to deal with it manually via tax filing which can be a pain in the ass. And I highly doubt my current tax account know about this.

 

 

 

 

 

Edited October 19, 2021 by hyten1

[ERICOPOLY]

3 minutes ago, hyten1 said:

having a call and expiring/selling at a loss and then buying a stock will not create a wash sale.

 

you would think otherwise!!! but apparently it is.  

 

I do think otherwise when the following condition (from the attorney) is not met:

 

"Happily for the taxpayer, though"... "the purchase of stock on November 2 is more than thirty-one days before the option expires"

 

 

 

[hyten1]

7 minutes ago, ERICOPOLY said:

 

I do think otherwise when the following condition (from the attorney) is not met:

 

"Happily for the taxpayer, though"... "the purchase of stock on November 2 is more than thirty-one days before the option expires"

 

 

 

 

yeah I agree, this is why I won't be doing this anytime soon, also back to the spirit of the law.

 

I am sure some hedge funds are skating right up to the the edge, the CFO friend I know, he doesn't do it, but he knows many who does, he has also been offer this advice from various lawyers that he has encounter throughout his career.

 

i don't know how tdamertriade, fidelity, etc. handle this in their system, if they don't match up the right transaction you won't be circumventing wash sale via what they send to the IRS

 

EDIT: also if you are interested I think the rest of the paper might provide some clue as to why equity to option is consider a wash sale but option to equity is not. 

 

 

Edited October 19, 2021 by hyten1

[ERICOPOLY]

5 minutes ago, hyten1 said:

also back to the spirit of the law.

 

If there were such a spirit I would not be taxed when I sell for a gain and repurchase a substantially identical security within 30 days.   Alas...

Edited October 19, 2021 by ERICOPOLY

[hyten1]

6 minutes ago, ERICOPOLY said:

 

If there were such a spirit I would not be taxed when I sell for a gain and repurchase a substantially identical security within 30 days.   Alas...

 

haha, agree.

 

the paper somewhat addresses why wash sale rules exist in the first place, and why your above senarios doesn't 

 

also even if I am interesting in skating right up to the edge, the thought of having to file this manually to counter what td or fidelity sends to the IRS gives me a headache (I am assuming td/fidelity won't match up the equity with the option trade unless I am wrong)

 

 

 

[ERICOPOLY]

32 minutes ago, hyten1 said:

 

haha, agree.

 

the paper somewhat addresses why wash sale rules exist in the first place, and why your above senarios doesn't

 

 

Oh, if the gains could be washed it would de facto eliminate capital gains tax.

[ERICOPOLY]

48 minutes ago, hyten1 said:

EDIT: also if you are interested I think the rest of the paper might provide some clue as to why equity to option is consider a wash sale but option to equity is not. 

 

You are saying the rest of the paper contradicts this statement from the attorney on page 29?

 

"Happily for the taxpayer, though"... "the purchase of stock on November 2 is more than thirty-one days before the option expires"

 

Can you cite the spot?

[hyten1]

27 minutes ago, ERICOPOLY said:

 

You are saying the rest of the paper contradicts this statement from the attorney on page 29?

 

"Happily for the taxpayer, though"... "the purchase of stock on November 2 is more than thirty-one days before the option expires"

 

Can you cite the spot?

 

one page 4 the author acknowledge the problem that we currently have, option to equity doesn't trigger wash sale,

 

page 4.

 

Fortunately, current law already comes to the right answer in some cases. Most importantly, it finds a wash sale when stock is replaced with a call option. Commentators generally attack this result as overbroad, since options are economically different from stock. In response, this Article defends this widely criticized rule, showing that it is appropriate in light of our system’s generous treatment of gains. Of course, other aspects of current law do not conform to the “call spread” theory. In response, this Article recommends specific changes (or at least clarifications) of current law. For instance, a wash sale should be triggered when stock replaces a call option, when a put option replaces a short sale...

 

on page 27 note 63, There is an asymmetry in applying the “substantially identical” test to stock and options. According to Rev. Rul. 56-406,

 

 

sorry eric, this is all have, if you find anything more let me know

 

 

 

 

 

Edited October 19, 2021 by hyten1

[ERICOPOLY]

21 minutes ago, hyten1 said:

 

one page 4 the author acknowledge the problem that we currently have, option to equity doesn't trigger wash sale,

 

page 4.

 

Fortunately, current law already comes to the right answer in some cases. Most importantly, it finds a wash sale when stock is replaced with a call option. Commentators generally attack this result as overbroad, since options are economically different from stock. In response, this Article defends this widely criticized rule, showing that it is appropriate in light of our system’s generous treatment of gains. Of course, other aspects of current law do not conform to the “call spread” theory. In response, this Article recommends specific changes (or at least clarifications) of current law. For instance, a wash sale should be triggered when stock replaces a call option, when a put option replaces a short sale...

 

on page 27 note 63, There is an asymmetry in applying the “substantially identical” test to stock and options. According to Rev. Rul. 56-406,

 

 

sorry eric, this is all have, if you find anything more let me know

 

 

 

 

 

 

No, he is saying 'should', he is not saying that it 'is' that way.

 

Remember that he is writing the paper as an academic:

"Rather, the “call spread” approach is offered as a theory for policymakers to determine the “right” answer as a matter of policy."

 

He writes:

For instance, a wash sale should be triggered when stock replaces a call option

 

It 'should' work that way (he writes).  'Should' is not to be confused with 'is'.  He literally means 'should' and the word choice is very cautious.

 

Later, on pages 47-49 he shows how 'should' and 'is' are different and he mentions "of course" the 30 day rule.  

 

 

[ERICOPOLY]

In other words, on pages "27-29" he provides an example of how 'should' isn't happening out in the real world (they hold the expiring call beyond the wash sale period).

 

That is not contradicted by what is written on page 4.

 

 

 

Edited October 20, 2021 by ERICOPOLY
fixed the page numbers

[hyten1]

4 hours ago, ERICOPOLY said:

 

I do think otherwise when the following condition (from the attorney) is not met:

 

"Happily for the taxpayer, though"... "the purchase of stock on November 2 is more than thirty-one days before the option expires"

 

 

 

Eric I am not sure why the author mention the 31 days, I don’t think you need that, maybe contact author for clarification or someone else

 

my understanding is that, the asymmetry factor applies,  and that is all you need in this case:

 

sell stock -> buy call (wash sale)

sell option (you own calls) -> buy stock (no wash sale) 

 

 It seems where you take the lost determines if wash sale rules applies or not. Selling option at a lost is different than selling the stock at a lost.

 

this is my current understanding, correct me if I am wrong or missing something

 

[ERICOPOLY]

2 hours ago, hyten1 said:

Eric I am not sure why the author mention the 31 days, I don’t think you need that, maybe contact author for clarification or someone else

 

 

He already told us why he mentioned 31 days.  He says so right on page 29.

 

quoting from page 29:

"Of course, the loss would not be deductible if expiration of the option was itself a wash sale."

 

[scorpioncapital]

The way I see it is if you like the stock at a loss and don't think its going much lower, just sell it and buy it back after 31 days. There is some risk that it goes up but it would have to go up beyond the loss you took. If the loss is a small one, I would forget it. If it's a big one, you might lose a bit in those 30 days. Overall I think its worth taking the risk.