Would anyone be kind enough to let me know if closing a put option at a loss, and immediately buying that stock would trigger a wash sale. I sell puts for stocks that I wouldn't mind owning, but some of my puts are now deep in the money. I suspect these options will be assigned early after the upcoming ex-dividend date. Rather than be assigned, I was thinking of capturing the tax loss by closing the put and then immediately buying the stock before the ex-div date. Would doing this trigger a wash sale? Thanks for any advice.
Does closing a put option and buying that stock result in wash sale?
- Thread starter newoptionstrader
- Start date
You should definitely check with a tax pro, but to me that doesn't capture the loss. You are just closing the put and buying the stock. Two separate trades. You have a loss on the puts and when you sell the stock you will have a capital gain or loss. But I believe if you own the stock you will create a taxable event if you "presell" it by writing a deep in the money call on it. You might be able to find a better answer if you check with greentradertax.
Your rationale for closing the put is why there is a wash sale rule.
Thus, your answer is contained in your own question.
I have done something similar many times over several years. I have been long a stock, sold the stock to realize losses and sold a long-duration deep ITM puts to effectively stay in the position and free up capital. My accountant gave the OK and IB did not flag it as a wash sale. So I think you are fine doing that. You can even sell an ETF like VOO and buy SPY and avoid the wash sale. It's very loose.
Robert Morse
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The Wash Sale rule is quite general. The IRS will rely on your broker's report-1099. If you disagree with the 1099 at end of year you can talk to you tax professional about entering the trades differently with a backup letter.
Wash Sales
A wash sale occurs when you sell or trade securities at a loss and within 30 days before or after the sale you:
Buy substantially identical securities,
Acquire substantially identical securities in a fully taxable trade, or
Acquire a contract or option to buy substantially identical securities.
Internal Revenue Service rules prohibit you from deducting losses related to wash sales. For more information about wash sales, read IRS Publication 550, Investment Income and Expenses (Including Capital Gains and Losses).
From what I read on wash sales rules, rolling the option over to a different expiration date or strike price is not considered a wash sale. Whereas selling a stock you own and then selling deep ITM put is indeed considered a wash sale since it's likely to be exercised, as opposed to selling ATM or OTM puts. I'm surprised that ET180's accountant and IB did not consider deep ITM puts as a wash sale.
But regarding my question of capturing tax loss by closing put early and then buying a stock, I still haven't found any info on this online. I'm surprised more people don't do this, it makes sense if you plan to hold on to the stock for a long time, but still deduct the losses from options on this year's taxes. If you don't plan on holding the stock, then I agree doing this makes no sense, since the option loss will be reflected in the assigned stock's price when you sell that stock.
But regarding my question of capturing tax loss by closing put early and then buying a stock, I still haven't found any info on this online. I'm surprised more people don't do this, it makes sense if you plan to hold on to the stock for a long time, but still deduct the losses from options on this year's taxes. If you don't plan on holding the stock, then I agree doing this makes no sense, since the option loss will be reflected in the assigned stock's price when you sell that stock.
I'm pretty sure that one can sell an S&P ETF like VOO and buy SPY without triggering the wash sale rule. These are two substantially similar ETFs, but somehow escape the wash sale rule. I'd have to double-check to be 100% sure, but I'm 95% sure that is what my accountant told me. According to the wash sale rule, that type of trade should be considered a wash sale. But it's not enforced. The problem is that there is a lot of ambiguity. What happens if I sell an ETF and short a deep ITM put of the underlying. At first they trade nearly identical, but as the underlying increases, the delta on the put continuously changes and heads towards zero unlike the underlying that I was previously holding. I can make a better case for two S&P ETFs being similar vs. stock and the underlying.