Options and 30 Wash Rule

[sowersnc]

I have a tax question for you guys. I purchased some JUN OEX puts in May and sold for a combined profit. But my first entry ended up being a small loser 2 were purchased at 6.5 and sold for 5.3. My question is do I need to wait until July 3rd in order to purchase any kind of OEX(puts,calls) in order to recognize the the loss above?

One other question is I read on a site that the wash rule applies to 30 days before and after the sale? So does that mean you need to hold the initial purchase 30 days before you can sell it for a loss and claim that loss?


OEX JUN06 570 P (100) 2006-05-24, 09:31:34 CBOE 2 6.5000
OEX JUN06 570 P (100) 2006-05-25, 09:30:24 CBOE 3 4.4000
OEX JUN06 570 P (100) 2006-05-26, 11:26:59 CBOE 5 2.5000
OEX JUN06 570 P (100) 2006-05-30, 15:56:44 CBOE -10 5.3000

Thanks in advance!!

[DSteckler]

Wash sale rules are tricky and a chat board probably is not a good place to get an answer if what you want is the correct answer <g>. Try a CPA or tax attorney. You could also browse the IRS web site. www.irs.gov

[sowersnc]

I was reading the IRS guide on cap gains and losses and it is kind of ugly.

If I read this thing correctly it looks like if was was to break the 30 day rule, my cost basis of the -240(2 X 6.5 - 2 X 5.3) could be added into my next purchase of substantially identical stock.

I assume June 570 and July 565 puts would be substantially identical.

I will talk to my accountant on it later this week. I was just curious if anyone had knowledge of this, you are right it is tricky language.

[IIC]

Wash sale rules are tricky and a chat board probably is not a good place to get an answer if what you want is the correct answer <g>. Try a CPA or tax attorney. You could also browse the IRS web site. www.irs.gov

Dave...I hate to be picky...But this is not a chat board...It is a forum. On a chat board you see the comments almost immediately depending on your settings. (Love to give 'ya a hard time)

Now...To the question at hand...I agree that you should check the IRS site...If you cannot find the answer there then Google it...I would not waste my money on some 2 bit CPA or Tax Attorney though unless you are talking 6 figures or more...IIC

[sowersnc]

Dave...I hate to be picky...But this is not a chat board...It is a forum. On a chat board you see the comments almost immediately depending on your settings. (Love to give 'ya a hard time)

Now...To the question at hand...I agree that you should check the IRS site...If you cannot find the answer there then Google it...I would not waste my money on some 2 bit CPA or Tax Attorney though unless you are talking 6 figures or more...IIC

I have to meet with my CPA on a messed up return from 2004, so I will just ask then. We are talking little figures but if I want to understand this rule for the future.

But based on the IRS rules it just looks like the loss is passes on to the next security when you break the 30 day rule. Doesn't look like a big deal to me...

[jiesen]

no loss on that sale

I have a tax question for you guys. I purchased some JUN OEX puts in May and sold for a combined profit. But my first entry ended up being a small loser 2 were purchased at 6.5 and sold for 5.3. My question is do I need to wait until July 3rd in order to purchase any kind of OEX(puts,calls) in order to recognize the the loss above?

One other question is I read on a site that the wash rule applies to 30 days before and after the sale? So does that mean you need to hold the initial purchase 30 days before you can sell it for a loss and claim that loss?


OEX JUN06 570 P (100) 2006-05-24, 09:31:34 CBOE 2 6.5000
OEX JUN06 570 P (100) 2006-05-25, 09:30:24 CBOE 3 4.4000
OEX JUN06 570 P (100) 2006-05-26, 11:26:59 CBOE 5 2.5000
OEX JUN06 570 P (100) 2006-05-30, 15:56:44 CBOE -10 5.3000

Thanks in advance!!

I think you're reading too far into that wash sale rule, sowers. You didn't lose on that sale, you profited! So the wash sale rule doesn't apply.

To calculate the profit/loss on a sale, you take your sale proceeds and subtract the cost basis (5300-3870=1430). Since it's positive, you've made a profit. Just report the profit and pay your income tax on it, and the IRS will love you. Now if you'd sold those 2 options on the 24th right after you bought them for 5.3, the wash sale rule would apply, since you purchased the same option again the next day. However, it just means you need to apply that loss to your cost basis of that next trade, and when you sold them on the 30th together, it all gets washed out anyway and you still report the profit as you would normally without that rule.

Another thing you seem to have gotten mixed up is the holding for 30 days. It's not that you need to have held the position for 30 days, it's that you need to stop trading it for 30 days after selling out if you want to recognize a loss. Otherwise your losses could keep getting put off into the next year's tax return.

The point of the rule is it stops someone from doing this:

Ernie buys stock A at $50.
Price drops to $10.
Ernie knows that stock A makes $5/shr each year and would never REALLY sell at $10, but because of his HUGE 15% gains on 10 other stocks this year, would really like to take a $40 paper loss right about now to put off paying taxes until this stock gets back to $60, so...
Ernie sells stock A for $10 then buys it back for $10 the same/next day.
Ernie reports a massive $40/shr loss and pays no taxes that year.

The IRS hates it when people don't pay taxes.

You can still do the above trick, though, just as long as you wait 30 days between selling the loser and buying it back.

I'm not a CPA though, so listen to Dave, and consult the IRS or a real tax guy before doing anything stupid based on what I just said. And pay your taxes.

[sowersnc]

I think you're reading too far into that wash sale rule, sowers. You didn't lose on that sale, you profited! So the wash sale rule doesn't apply.

To calculate the profit/loss on a sale, you take your sale proceeds and subtract the cost basis (5300-3870=1430). Since it's positive, you've made a profit. Just report the profit and pay your income tax on it, and the IRS will love you. Now if you'd sold those 2 options on the 24th right after you bought them for 5.3, the wash sale rule would apply, since you purchased the same option again the next day. However, it just means you need to apply that loss to your cost basis of that next trade, and when you sold them on the 30th together, it all gets washed out anyway and you still report the profit as you would normally without that rule.

Another thing you seem to have gotten mixed up is the holding for 30 days. It's not that you need to have held the position for 30 days, it's that you need to stop trading it for 30 days after selling out if you want to recognize a loss. Otherwise your losses could keep getting put off into the next year's tax return.

The point of the rule is it stops someone from doing this:

Ernie buys stock A at $50.
Price drops to $10.
Ernie knows that stock A makes $5/shr each year and would never REALLY sell at $10, but because of his HUGE 15% gains on 10 other stocks this year, would really like to take a $40 paper loss right about now to put off paying taxes until this stock gets back to $60, so...
Ernie sells stock A for $10 then buys it back for $10 the same/next day.
Ernie reports a massive $40/shr loss and pays no taxes that year.

The IRS hates it when people don't pay taxes.

You can still do the above trick, though, just as long as you wait 30 days between selling the loser and buying it back.

I'm not a CPA though, so listen to Dave, and consult the IRS or a real tax guy before doing anything stupid based on what I just said. And pay your taxes.

thanks jiesen

Your example cleared up the purpose of the rule for me. I was failing to understand the purpose of the rule.
So because they have this rule now. The big guys $40/shr loss would be added into the cost basis of the $10/shr purchase because he did not wait 30 days.

I'll still talk to the CPA but at least I will have a clue about the rule now.

[DSteckler]

I'm not a CPA though, so listen to Dave, and consult the IRS or a real tax guy before doing anything stupid based on what I just said. And pay your taxes.

Options are not stocks; they're treated differently for wash sales rules purposes. That's why I suggested speaking with a CPA.

[jiesen]

Options are not stocks; they're treated differently for wash sales rules purposes. That's why I suggested speaking with a CPA.

goes to show how much I know! thanks for pointing that out, Dave.