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Tax loss harvesting with selling ITM Put options
- Thread starter assetalloc
- Start date
Yes, you clearly were out of line in calling a simple discussion on taxes as"
"you created your own problems"....
Accountants and tax preparers must disclose their profession when they discourage others from discussing tax-related issues that affect trading.
Yes, I went back and read a few discussions, and I am afraid both zdreg & ajacobson may have a tendency to back each other and derail good discussions often. It's always suggesting others to talk to accountants and not trust the threads.
Nobody is giving advice here. If we discuss things, both of you always jump in to scare others.
"you created your own problems"....
Accountants and tax preparers must disclose their profession when they discourage others from discussing tax-related issues that affect trading.
Yes, I went back and read a few discussions, and I am afraid both zdreg & ajacobson may have a tendency to back each other and derail good discussions often. It's always suggesting others to talk to accountants and not trust the threads.
Nobody is giving advice here. If we discuss things, both of you always jump in to scare others.
There is a thread on this on here from about a year ago. I also asked my accountant about it and basically it works like this. You can't own the stock for at least 30 days (maybe it's 35...I did 2 months just to be safe.). What I did was sell the stock, short deep ITM put expiring more than 3 months out with enough premium to reduce the risk of early assignment. Eventually the stock was assigned. I stayed in the position and no wash sale.
I have been reading about references posted by @MoreLeverage on this thread. It seems deep ITM options will be considered substantially similar to owning the stock. And should trigger the wash sale rule.
So I am not sure if you were allowed to take loss on your first sale of stock. Ideally, that loss should have carried over to ITM put you sold & then to the stock when it got assigned, based on chaining/ straddle laws described. Are you sure that your accountant allowed/ suggested you such trade? (Sell stock at loss --> sell ITM put (that doesn't get assigned for 30 days) --> get assigned --> hold the stock)
I came up with the trade and asked my accountant. He said it was fine. Anyhow, I think IB automatically calculates the wash sales for you, but if you're concerned about it, ask a tax professional. I'd be curious on hearing a second opinion from a tax professional. My understanding is that the language is very vague. What constitutes substantially similar? VDE vs. XLE? Basically the same exposure. SPY vs VOO. Swap a vanguard sector ETF for the same iShares ETF. That doesn't count as substantially similar so why would a deep ITM put for shares? How about ATM put for shares? How about sell shares, buy a call, and short the ATM put (trade a synthetic). You can create all kinds of complex positions to very closely replicate the original position. Shorting a put instead of holding stock doesn't provide the same returns at all price levels because with shares you have a delta of 1 at all levels and short put you have a variable delta. So different exposure. Anyhow, I don't think they really have a way of enforcing that rule even if they decided to.
Unfortunately, I do my own taxes and don't have a tax professional to speak to.I came up with the trade and asked my accountant. He said it was fine. Anyhow, I think IB automatically calculates the wash sales for you, but if you're concerned about it, ask a tax professional. I'd be curious on hearing a second opinion from a tax professional. My understanding is that the language is very vague. What constitutes substantially similar? VDE vs. XLE? Basically the same exposure. SPY vs VOO. Swap a vanguard sector ETF for the same iShares ETF. That doesn't count as substantially similar so why would a deep ITM put for shares? How about ATM put for shares? How about sell shares, buy a call, and short the ATM put (trade a synthetic). You can create all kinds of complex positions to very closely replicate the original position. Shorting a put instead of holding stock doesn't provide the same returns at all price levels because with shares you have a delta of 1 at all levels and short put you have a variable delta. So different exposure. Anyhow, I don't think they really have a way of enforcing that rule even if they decided to.
ETFs are a relatively new phenomenon. I didn't read much about them
But options have been around for a very long time. I don't remember exact revenue codes, but there seems to be a more clear definition of substantially similar securities:
- Any call after selling a stock within 30days
- closing ITM call or put before/after buying a stock with 61 day rule
Nit pick - the term is substantially identical, not similar, for wash sales. That’s why options on a stock may be treated the same as a stock, but why different ETFs at least so far are not. ETFs, while similar, are often not identical in their index methodology, statistical sampling of holdings vs full replication, expenses, voting rights, etc. similar, often yes, but arguably not substantially identical.
Nit pick - the term is substantially identical, not similar, for wash sales. That’s why options on a stock may be treated the same as a stock, but why different ETFs at least so far are not. ETFs, while similar, are often not identical in their index methodology, statistical sampling of holdings vs full replication, expenses, voting rights, etc. similar, often yes, but arguably not substantially identical.
One thing I'll add is that when I do replace stock with short ITM options, I'll hold for at least 90 days...mostly because I have to in order to get enough extrinsic value so that the option won't be exercised early and cause a wash sale. I'll usually go 4 - 8 months from expiration. I think that there's just so many ways around the wash sale rule, it can only really be enforced when the exact same instrument is repurchased after a unprofitable sale.
One thing I'll add is that when I do replace stock with short ITM options, I'll hold for at least 90 days...mostly because I have to in order to get enough extrinsic value so that the option won't be exercised early and cause a wash sale. I'll usually go 4 - 8 months from expiration. I think that there's just so many ways around the wash sale rule, it can only really be enforced when the exact same instrument is repurchased after an unprofitable sale.
This may not sound correct. Please take a scenario below and I'd be happy to know that it's not a wash sale!
1) Jan 2018 - Mary sold XYZ naked OTM May put Strike $100 for $5
2) May - Sock falls to $70. Mary rolls Oct put strike $100 for $1
3) Oct - the stock has fallen to $50, Mary rolls Feb 19 out Strike $100 for $1
Can Mary deduct approx. $50 in trading losses when she covered her puts? Or has to wait when she finally closes her position?
Everytime you roll, you're effectively closing the short put you hold for a loss and selling another put. So the trade consists of closing one trade at a tax-harvested loss and selling a new put. So the answer is yes. In October after having made the final trade, she would have $44 worth of losses.
@ET180Everytime you roll, you're effectively closing the short put you hold for a loss and selling another put. So the trade consists of closing one trade at a tax-harvested loss and selling a new put. So the answer is yes. In October after having made the final trade, she would have $44 worth of losses.
What makes the rolling so much ITM puts in above example allowable tax loss? Is it just duration, and is it because puts were not assigned? Can you provide your reasoning?