Wash sale rule help required for buy call options

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pinvest2021
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Joined: Thu Sep 23, 2021 3:51 pm

Wash sale rule help required for buy call options

Post by pinvest2021 »

Hi,
I have bought ( on 8/5/2021) a call option of xyz ticker for 1200 premium expiry 9/3 and strike price 125. And bought another one (buy call) for premium 800 ( bought on 8/15) for strike 115 and expiry 9/3.
Now for example at end the expiry first one become zero and second one I sold at 105 price.

Also I have 150 stocks for the ticker which i did not touch yet and bought dec 2020.

Now please could tell me how wash sale will impact me here .

Thanks
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grabiner
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Location: Columbia, MD

Re: Wash sale rule help required for buy call options

Post by grabiner »

Welcome to the forum!

A wash sale applies if you sell for a loss, and, within 30 days before or after, buy substantially identical securities, or acquire an option to buy them. You will have to check with your tax advisor whether the two options are substantially identical; the IRS doesn't have clear guidance here.

But even if they are, it shouldn't hurt you. You sold the first option for a loss (when it expired worthless, you "sold" it for zero). Therefore, you could not deduct the loss, but the loss was added to the basis of the replacement, which is the second option. Thus, when you sold the second option, your loss on that option includes the disallowed loss, so it is the total of your losses on the two options.

Holding the stock does not create a wash sale, because the wash requires a buy and a sell. While the wash sale would apply if you sell stock for a loss and buy a call option on that stock within 30 days before or after, you didn't sell the stock.
Wiki David Grabiner
Shallowpockets
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Re: Wash sale rule help required for buy call options

Post by Shallowpockets »

The thing about your question is that you are thinking a wash sale at all. You are going into a trade thinking there may be a loss, why do it?
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grabiner
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Re: Wash sale rule help required for buy call options

Post by grabiner »

Shallowpockets wrote: Fri Sep 24, 2021 9:40 am The thing about your question is that you are thinking a wash sale at all. You are going into a trade thinking there may be a loss, why do it?
This is a transaction which already happened, and the OP didn't have a choice about realizing the loss anyway, since an option expired worthless.

However, the situation is a warning that you need to understand the tax treatment before you start trading options. Taxes are a cost, and if you don't take that cost into account in your trading, you may lose money unnecessarily. In this example, if the OP had exercised the option that was in the money (rather than selling it), the wash sale rule would have disallowed the loss on the expired option until the purchased stock was sold.
Wiki David Grabiner
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