Question

Do taking losses on put options of individual equities play into wash sale rules?

Forum|Forum|4 years ago
February 9, 2022
1 reply
0 views

If i have a large equity position in a certain stock, opened over a month ago, and throughout the life of the option, i use put options to hedge some of the risk....later on, if i sell any portion of the straight equity at a loss, do wash sale rules apply (mainly i'm buying out of the money puts, that should take losses, but may also lead to gains)? i thought wash sale might come into play, if i am trading these options on a rolling 30 day basis

TurboTax Online

D

DavidD66

When you own a stock and the purchase an option on the underlying stock, you have a straddle. Straddles are subject to loss deferral rules as well as rules similar to the wash sale rules. If a stocks or securities make up a position in the straddle, Rule 1 applies. Under Rule1, "You cannot deduct a loss on the dis-position of shares of stock or securities that make up the positions of a straddle if, within a period beginning 30 days before the date of that disposition and ending 30 days after that date, you acquired substantially identical stock or se-curities. Instead, the loss will be carried over to the following tax year, subject to any further ap-plication of Rule 1 in that year. This rule will also apply if you entered into a contract or option to acquire the stock or securities within the time period described above.

For more information see IRS Publication 550 (2020), Investment Income and Expenses

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

P

paul-j-heckmanAuthor

i'm not sure i see how it's a straddle. a straddle is generally a call and put at different strikes.

isn't it just a downside hedge (for this question, let's just assume long equity X, and a long put option on X that is 30% lower than it's current market price)

now, i'm not going to touch the equity for a while. say, for example, i bought equity X on January 21 of this year. then on February 25th i buy a 3 week put option on equity X that takes a full loss at the expiration date 3 weeks out. Then on March 19th I sell a portion of the equity at a loss.

Is the portion of the equity sold at a loss on Mar 19 a wash sale?

JohnB5677

The answer is yes. Under certain conditions stocks, put and calls are all related as being essentially the same security.

A wash sale occurs when an investor sells or trades a security at a loss, and within 30 days before or after, buys another one that is substantially similar. It also happens if the individual sells the security at a loss, and their spouse or a company they control buys substantially similar security within 30 days.

The wash-sale rule prevents taxpayers from deducting a capital loss on the sale against the capital gain. Wash Sale Rule

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"