Wash sale rules and retirement accounts

[Red Lion]

I'm the worst at keeping up with wash sales rules. 

 

I have several stocks in my retirement accounts sitting on gains. I'd like to sell them and buyback the shares in a taxable account. Is this some sort of wash sale even though the gains would be realized in a tax deferred account? Would I still be able to use the higher cost basis from purchase in the taxable account? 

 

I also have a larger position (JOE) where I'm sitting at a loss. Would this be a wash sale? Would my new cost basis still be the lower cost basis in the taxable account? 

[Spekulatius]

If you sell something in a taxable account to realize a tax loss and then buy the same stock at the same time or <30 days later in a tax deferred account, you violate the wash sale rule. The IRS is probably are not going to catch it but if they will you will pay taxes and fines.
I am not sure why you think that taking a gain in tax deferred account violates a wash sale rule.

[Red Lion]

1 hour ago, Spekulatius said:

If you sell something in a taxable account to realize a tax loss and then buy the same stock at the same time or <30 days later in a tax deferred account, you violate the wash sale rule. The IRS is probably are not going to catch it but if they will you will pay taxes and fines.
I am not sure why you think that taking a gain in tax deferred account violates a wash sale rule.

 

Thank you. I didn't think there was a wash sale rule for retirement accounts, but felt like I had got hit with one in a previous year where I had retirement/taxable accounts at the same brokerage. I can't seem to find this transaction though, and I might just have a misapprehension about the prior year wash sale. 

 

I just want to make sure I'm not missing something, because I'm planning to transfer some long term holdings to taxable, and then use the freed up funds to sell cash secured weekly puts/calls (if I get assigned) inside the retirement account, which has been an effective strategy for me before, but I want to avoid short term capital gains on the options activity and I need cash to secure these puts.

[villainx]

My understanding is wash rules is for losses. Doesn't sound like it applies since you say it's sitting on gains?

[Red Lion]

24 minutes ago, villainx said:

My understanding is wash rules is for losses. Doesn't sound like it applies since you say it's sitting on gains?

 

My only loss would be JOE, I can't deduct the loss since it's in a retirement account, so I'm hoping there wouldn't be any wash sale, I checked investopedia and they seem to indicate like @Spekulatius that the only wash sale issue would be selling a loser in a taxable account and buying back in an IRA, at which point you can't deduct the losses from the loss. I suspect this may have happened in my prior year's mishap. 

[lnofeisone]

It's only an issue if you claim loss in taxable and buy identical shares in non-taxable accounts. Also, sounds like you have gains so wash sale wouldn't apply. 

[Red Lion]

15 hours ago, lnofeisone said:

It's only an issue if you claim loss in taxable and buy identical shares in non-taxable accounts. Also, sounds like you have gains so wash sale wouldn't apply. 

Thank you!

[LC]

Does anyone use options to maintain exposure while waiting out the 30-day clock on wash sales?

 

For instance, let's say you own 100 shares of JOE with a cost basis of $50.

 

You're sitting on a loss today, and let's say your goal is to capture that tax loss. But because you still want to maintain your exposure, I would double down and buy a 2nd lot of 100 shares today. Then wait 31 days and sell the initial 100 shares to capture that loss.

 

What about: 

Instead of buying that second lot, what about buying an ITM call option? 

This would maintain the exposure, but reduce the amount of capital you are committing (buying an option vs buying a 2nd lot of 100 shares).

 

Curious if anyone does this, and  if so what their experience has been?

[73 Reds]

35 minutes ago, LC said:

Does anyone use options to maintain exposure while waiting out the 30-day clock on wash sales?

 

For instance, let's say you own 100 shares of JOE with a cost basis of $50.

 

You're sitting on a loss today, and let's say your goal is to capture that tax loss. But because you still want to maintain your exposure, I would double down and buy a 2nd lot of 100 shares today. Then wait 31 days and sell the initial 100 shares to capture that loss.

 

What about: 

Instead of buying that second lot, what about buying an ITM call option? 

This would maintain the exposure, but reduce the amount of capital you are committing (buying an option vs buying a 2nd lot of 100 shares).

 

Curious if anyone does this, and  if so what their experience has been?

I don't believe you can do that.  Though I haven't traded options in many years, wash sale rules apply to the same and even similar securities, including options.  I remember inquiring about this very issue.  Even using a retirement account to repurchase the same or similar stock within 30 days of (both before or after) the sale triggers the wash sale rule.  As a practical matter, I remember asking a CPA how the purchase in a separate retirement account could even be tracked, and his response was "do you want to take the risk"?

Edited March 26, 2025 by 73 Reds
spelling

[Red Lion]

14 minutes ago, 73 Reds said:

I don't believe you can do that.  Though I haven't traded options in many years, wash sale rules apply to the same and even similar securities, including options.  I remember inquiring about this very issue.  Even using a retirement account to repurchase the same or similar stock within 30 days of (both before or after) the sale triggers the wash sale rule.  As a practical matter, I remember asking a CPA how the purchase in a separate retirement account could even be tracked, and his response was "do you want to take the risk"?

 

Would the strike price make a difference in determining whether it was a like security? I feel like I read something about this years ago, but don't remember the conclusion. 

[73 Reds]

1 minute ago, Red Lion said:

 

Would the strike price make a difference in determining whether it was a like security? I feel like I read something about this years ago, but don't remember the conclusion. 

@RedLion I don't think the strike price matters.  In fact, I also remember asking the CPA to define a "similar security" for purposes of the rule and he said that it is subject to IRS discretion.   So even selling an ETF and exchanging it for a different ETF with largely the same or similar holdings could trigger the rule. 

[LC]

1 hour ago, 73 Reds said:

I don't believe you can do that.  Though I haven't traded options in many years, wash sale rules apply to the same and even similar securities, including options.  I remember inquiring about this very issue.  Even using a retirement account to repurchase the same or similar stock within 30 days of (both before or after) the sale triggers the wash sale rule.  As a practical matter, I remember asking a CPA how the purchase in a separate retirement account could even be tracked, and his response was "do you want to take the risk"?

 

To clarify, I am not trying to circumvent the 30 day wash sale rule, just trying to reduce the capital committed:

 

So like:

 

Day 1: Buy 100 shares of XYZ

Day 49: Shares fall 50%

Day: 50: Buy 1 deep ITM call option on XYZ

Day 81: Sell 100 shares of XYZ and capture tax loss

 

Then either 

Day 82: Convert option back to 100 shares

or would you need to wait another 30 days, so like:

Day 112: Convert option back to 100 shares?

 

[Red Lion]

@LC I feel like you could also buy a call option on day 50, wait until day 81 to sell under this scenario. 

[73 Reds]

51 minutes ago, LC said:

 

To clarify, I am not trying to circumvent the 30 day wash sale rule, just trying to reduce the capital committed:

 

So like:

 

Day 1: Buy 100 shares of XYZ

Day 49: Shares fall 50%

Day: 50: Buy 1 deep ITM call option on XYZ

Day 81: Sell 100 shares of XYZ and capture tax loss

 

Then either 

Day 82: Convert option back to 100 shares

or would you need to wait another 30 days, so like:

Day 112: Convert option back to 100 shares?

 

That's getting a little past my pay grade but would think that since an option is an inherent right to buy the stock and more than 30 days passed from the date the option was purchased and the date initial shares were sold you should be OK but I've learned from prior experience that the IRS does not always accept what is otherwise a logical taxpayer argument.  Caveat Emptor.

[LC]

Thanks all - appreciate your input. I think what @Red Lion described above should work.

 

And then just to be safe, when (if) converting the option back to shares - I would wait 30 days past the date of the tax loss sale.

 

The option should in theory be a minimum of 60 (or 62)+ days to expiry, just to be safe.

[lnofeisone]

2 hours ago, Red Lion said:

@LC I feel like you could also buy a call option on day 50, wait until day 81 to sell under this scenario. 

This would not work if the stock stays flat as he won't have a loss to capture on the option. So shares would need to be sold. 

[lnofeisone]

3 hours ago, Red Lion said:

 

Would the strike price make a difference in determining whether it was a like security? I feel like I read something about this years ago, but don't remember the conclusion. 

If you search, there is a thread with some passionate wash sale discussion. 

 

1) Look up Gantner vs. IRS Commissioner case. In that case the taxpayer purchased call options, sold them at a loss, and then bought shares. Tax court ruled that options are not the same as stock.

 

2)  Having said that, congress did amend rules to say that wash sales rule do apply to options and stock/option combos.

 

Net, net the language "like securities" muddies the water a lot. Basically, options, no matter the strike, etc. and stock are treated the same in the eyes of IRS. 

[lnofeisone]

3 hours ago, LC said:

 

Then either 

Day 82: Convert option back to 100 shares

or would you need to wait another 30 days, so like:

Day 112: Convert option back to 100 shares?

 

The conversion to shares can cause all sorts of issues. Your basis will be strike price + cost of option. If price of the stock went down, exercising won't let you capture that loss. Inversely, if the stock price went up, you are not paying tax on gain until you sell the stock.

 

Also, the clock on long term/vs. short term taxation starts when you exercise. So the period of you holding the option doesn't count for LT tax purposes. 

[LC]

That does make sense. I think it is relatively fair.

 

For the option leg, if I exercise and the stock has gone down, I will be sitting on an unrealized loss. Similar on the upside. Only "loss" would be the 60 or so days holding the option vs. the 12 month LT period.

 

I think it's a fair price to pay for maintaining the original position exposure at a cheaper price, vs. paying the full amount to buy a 2nd block of shares. Thanks @lnofeisone

[TwoCitiesCapital]

22 hours ago, 73 Reds said:

@RedLion I don't think the strike price matters.  In fact, I also remember asking the CPA to define a "similar security" for purposes of the rule and he said that it is subject to IRS discretion.   So even selling an ETF and exchanging it for a different ETF with largely the same or similar holdings could trigger the rule. 

 

This is correct. 

 

Trading in the same options is questionable and likely would get disallowed by the IRS in an audit. 

 

I work for a tax sensitive program that does monthly harvesting of securities. For individual stocks, we buy a similar ETF to retain market beta (so if harvested from a large value strategy, we buy a large value ETF with the harvested proceeds) OR an alternative name (selling Coke, buying Pepsi).

 

If we're harvesting losses on an ETF, we have lots of similar ETFs that are benchmarked to different indices. I believe the rule is that there can be no more than 70% overlap or they're considerer 'substantially similar ' by the IRS. Picking a different benchmark with different weights and a different inclusion mechanism goes a long way to getting you below that 70%.