How Do You Avoid Wash Sale Rules?

Discussion in 'General Discussion' started by Paul J, Jun 24, 2017.

  1. Paul J

    Paul J New Member

    How are folks that are trading these monthly income strategies avoiding wash sale rules? Are you just taking Dec off? Other ideas?
  2. Harry

    Harry Well-Known Member

    If you are trading index (SPX, RUT, NDX), you anyways go mark to market due to some IRS rule, no? - My first year filing and still not done taxes yet but I expect wash sale will not even come into discussion because of these section 1256 contracts.
  3. ACS

    ACS Well-Known Member

    Yes 1256 contracts are not covered by the wash sale rule which involves not being able to deduct a loss from a trade if you buy a "similar" security within 30 days. In a worst case scenario, the IRS can disallow losses for one year forcing you to carry them over to the next year and making you pay taxes on paper gains you actually didn't have. 1256 contracts are all marked to market on the last day of the year and any P&L on open positions is just added to the P&L of all closed positions for that year. That MTM price is then used to calculate the basis for any positions that are carried over to the next year.
  4. Paul Demers

    Paul Demers Well-Known Member

    You have to also understand how your broker calculates MTM. My experience with TDAmeritrade is that they use the last actual price that the option was traded not the mid price at the close of business on Dec 31st.
  5. Paul J

    Paul J New Member

    Thanks all. From what I read, SPY is a gray area (broker specific) for the 1256 contract treatment while SPX definitely is a 1256 contract and not subject to wash sale rules.
  6. DGH

    DGH Administrator

    Here is my input on this question (comments not intended as specific recommendations or guarantees of accuracy):
    1. Wash sale rules (at present) apply only to taxable accounts. This may change in the future such that overlapping positions in non-taxable accounts might be subject to the rule.
    2. Brokers are not required to tell the trader how they determine MTM values on the last trading day of the year. I think Paul's comment above is correct, but I had a conference call with a TDAmeritrade representative who informed me that they are not required to detail the exact procedure they use. Nor would she tell me. So, be aware that "your" MTM value will probably not match that of the broker.
    3. Section 1256 contracts are not subject to wash sale rules and individual transactions do not have to be reported to the IRS. The trader is required to report gains and losses, however, on Form 6781.
    4. SPY, IWM, DIA, other ETFs and similar derivatives are considered to be equities. While it is true that, as far as I know, the IRS has not made a definitive ruling on whether they are considered to be Section 1256 contracts, most observers treat them as equities. They are therefore subject to wash sale rules. I do not trade them in my taxable accounts.
    5. Handling of wash sales is more complex than most traders think. For example, if the trader had 100 SPY shares but sold them piecemeal (30, 40, 10, 10, 10) for a net loss, then each transaction must be handled individually...not the total 100 shares as a the wash sale calculations are applied. This procedure is best handled by third party software, such as, but it can be done manually as line items for each transaction. It's a very tedious process, however.
    6. The broker's 1099 is often inaccurate with regard to wash sales. Again, this is often best handled by third party software if a trader has several equity positions which are affected by the wash sale rules.
    7. Non-Section 1256 transactions are individually reported to the IRS now, so they are more vigilant about applying wash sale rules.
    8. Unless there are glaring errors in the broker's 1099, it is usually best to use their calculations since they will probably not match the trader's calculations exactly. This is particularly true since the trader is not privy to the MTM procedures of the broker. A trader can add a Supplemental Statement to the return, but this might invite an audit if the IRS thinks that the trader has underpaid.
    9. To make the entire process easier for Section 1256 contracts which are carried over into the new tax year, it is a good idea to reduce the number of open strikes as much as possible prior to the last trading day. So, the trader can "bring in the wings" and consolidate positions in as few strikes as possible. Each open strike (long or short) will be marked to market, so the fewer the better. It is best to do this maneuver 2 or 3 days before Dec 31 so that the trades will be "settled" by the clearing house prior to Jan 1.
    Last edited: Jun 25, 2017
    Kevin CK, tom, Harry and 1 other person like this.
  7. Paul J

    Paul J New Member

    Good stuff. Thanks, Dan.
  8. PK

    PK Well-Known Member

    For a Europe based newbie this discussion about the US tax system is impressive! To be honest, and at the stage of managing a small 50-100k account in Europe, with all the accounts abroad (UK + US), and with rather small 15-20% return over the year, I confess that I am an absolute ignorant regarding how to make this compatible with EU tax rules. Any information welcome!

    Along the same lines, within the CD community is there any forum or teaching ongoing how to scale up from a small account to one to live from without taking the risk to end up in Alcatraz because of having evaded taxes?

    Thanks in advance for any advise on this issue!
  9. status1

    status1 Well-Known Member

    I think maybe there is a confusion about what the wash sale rule refers to
    The wash sale rule as far as I know is when you sell a stock and buy it back essentially the same stock within 30 days
    It has nothing to do with the end of the year MTM Those are 2 separate issues
    As far as the options are concerned it's not really a factor since most of the time when it;s rolled up or out it has a different strike and expiration so it is not a wash
    In example 5 that Dan presented it's not a wash unless you buy back the same exact strike and expiration within 30 days but I am not sure why would you want to do that unless you want to donate some cash to the broker
  10. Harry

    Harry Well-Known Member

    IRS's most conservative guideline states that anything essentially similar == same. Different expiration and strike is still still similar. You could have a losing SPY option at 211 expiring Dec 29 and you roll it to 210 expiring Jan 2nd - it is pretty much similar == same == identical. Of course you can take the opposite perspective, and it comes to play only when you get audited - otherwise for small amounts no one is going to care but at some time your broker statement will start getting exact and the discrepancy will show up.

    The discussion of MTM came into play because if you are trading individual stocks such as FB, GOOG, AMZN BTW you need to track wash sales. If you are trading RUT, IWM, SPY, DIA, then also you need to track wash sales. But instead of trading 10 contracts of SPY, you traded 1 contract of SPX, the whole problem goes away. You do not have to stay out of the market in December or January to take your loss.
    Paul Demers likes this.
  11. DGH

    DGH Administrator

    Hi Status1. Actually, I understood that there were two questions of concern: one dealing with wash sale rules for equities in a taxable account and the second with MTM rules for Section 1256 contracts. Also, according to and accountants who are knowledgeable in this area, ANY transaction of a single underlying equity, whether it is the stock, ETF, or option, is factored into whether or not the wash sale rule will be imposed. Harry is correct. So, 100 shares of SPY, a long SPY 210 put, a short SPY 190 call, etc. are all factored into the wash sale calculation process. The IRS does NOT view a different strike of the same equity as a different underlying. So, in fact, purchasing (or selling) an option of the same underlying with a different strike WOULD invoke the wash sale rule if a loss had occurred and the option was purchased (or sold) prior to the 30 day period. It gets even more complicated than that...the rule actually applies for a longer period of time than "30 days". That is, there is a "look forward" period as well as a "look back" period. If possible, I suggest that interested parties review the tax code on this subject or some of the Tradelogsoftware videos. The accountant who is associated with is well-recognized as an authority on options trading IRS rules. However, as Harry pointed out, nothing happens unless an audit is triggered. As I mentioned, the IRS now (as opposed to a few years ago) sees all taxable equity option transactions. One can only assume that they have software capable of calculating wash sales if they desire. Granted, small accounts with few options transactions will not likely come under scrutiny. But, for larger accounts with many taxable options transactions, I think the IRS would be more likely to analyze the transactions in detail (or force the taxpayer to do so in an audit...think "hourly accountant fees"), particularly if they thought the taxpayer underpaid. So, it's "taxpayer beware". I also assume that, if the IRS finds several unreported wash sales, they may bring out the magnifying glass.
    BTW, Harry, RUT is a Section 1256 vehicle; IWM is not. As I stated in the post above, Section 1256 contracts are not subject to wash sale rules at this time. That's one feature which makes them attractive vehicles, in addition to the 60/40 tax advantage. My two cents worth. Anyone in the community who has more precise knowledge, please step forward; I make no claims to be an expert. This is an important topic.
  12. Harry

    Harry Well-Known Member

    Ouch ... hindsight but what I meant to write was QQQ trying to cover the 4 major indices :(
    Yes RUT is 1256.
  13. status1

    status1 Well-Known Member

    Hi DGH From my understanding the OP was asking about the wash sales first and than followed it up with an end of the year question which seemed to me to be unrelated than the follow up replies were mostly about MTM and section 1256 contracts which did not seem to answer the original question or the title of the thread
    If that was 2 separate questions perhaps it should have been a separation between them
    Taking Dec off does not avoid a wash sale during the tax year

    As far as the wash sale about similar or identical I would have to check on that
    I have not checked lately but from what I understood in the past if the stock does not have the same cusip number or in an option case a same opra code than it's not identical

    It's very rare if I get a wash sale reported from my broker
    So far the only time I got a wash sale report was when I sold an option than a week later I covered the short than immediately went long with the exact same strike and expiration than closed it a few days later before expiration
    So on the 1099 there is only one cusip number for this transaction This was in 2015 so I am not sure if the regulation changed since then
  14. status1

    status1 Well-Known Member

    I just dug this up from the 2016 schedule D instructions in the wash sales section
    "The substantially identical stock or securities you bought had the same CU-SIP number as the stock or securities you sold and were bought in the same account as the stock or securities you sold. (CUSIP numbers are security iden-tification numbers.)"
    Seems to me like it's the same as it was in previous years
    So according to this rolling a SPY to a different strike or expiration would not have the same cusip and therefore the wash sale does not apply in this case
  15. Paul Demers

    Paul Demers Well-Known Member

    A quote I read
    "As we stress in our extensive content on wash sale loss deferral rules, Section 1091 rules for taxpayers require wash sale loss treatment on substantially identical positions across all accounts including IRAs. Substantially identical positions include Apple equity, Apply options and Apple options at different expiration dates on both puts and calls."

    from here

    So I think it is important to understand that for clarity it is best to consult a tax professional before you make any assumptions on what will happen with wash sale rules when trading options.
  16. AKJ

    AKJ Well-Known Member

  17. DGH

    DGH Administrator

    Hi Status1. Respectfully, please read more about the wash sale rules. I believe you are mistaken. Brokers are notoriously unreliable and inaccurate in their reporting and interpretation of wash sale rules. Here is a quote from the article to which Paul referred: Cost-basis regulations phased-in options as “covered securities” starting with 2014 Form 1099Bs. Brokers report wash sales based on identical positions, not substantially identical positions. Investors who trade equities and equity options cannot solely rely on Form 1099Bs and they should use their own trade accounting software to generate Form 8949. Learn more about wash sales in our Trader Tax Center.

    Note that brokers only report wash sales based on identical positions, such as those with identical CUSIP numbers as you mentioned. They do not calculate wash sales on various options on the same underlying, but the IRS can. By the way, Robert Green is the accountant I mentioned in a previous post who is associated with He is an acknowledged leader in this field. In any event, I will end my posts on this thread. I don't wish to argue with you, and I do not hold myself to be an expert. I can only say in my defense that I have researched this area for the past 23 years since we do our own taxes and have been forced to keep up with all the IRS changes. As I said previously, in the event of an audit, the IRS can require a detailed calculation of all wash sales according to their interpretation as well as a complete and thorough reconciliation of all items reported on the 1099 from your broker and the taxpayer's Schedule D, Form 8949, and Form 6781. I believe they are more likely to interpret the wash sale rules dealing with options in the same manner as Robert Green as opposed to the "different strike, different security" method which you outlined. Of course, there is some room for negotiation during an audit, but, unless the taxpayer was chosen at random, the IRS probably believes that there are sufficient disparities in the taxpayer's return to justify an audit. They will definitely want more money, since audits are a very expensive process for them, and they will challenge the taxpayer. And, yes, I have been audited.
    Jack and Harry like this.
  18. status1

    status1 Well-Known Member

    Thanks for clarification about the IRA accounts I did not know about that but I don't have one so that does not apply to me
    I was only speaking from my own past experience so I am not offering any tax advice to anyone here reading this
    Everyone has their own tax issues to resolve
    I follow the IRS rules as best as I can and I am not doing any tax loss selling at the end of the year or play any games to get some kind of gain I am using the Schedule D instructions If the IRS wants to be more specific they should spell it out exactly and make new instructions more clear not have some vague instructions and than let the taxpayer figure out what they meant by it I also keep my own records so I don't rely on the 1099 from the broker I just use that as a comparison to make sure all the figures are the same The only thing I may change is to close the SPX trade a few days before the end of the year to avoid the settlement date nonsense than open a new trade in March expiration probably

    Since the term substantially identical is not spelled out than it becomes a subject of interpretation so how far does this get carried out ?
    If I buy and/or sell a BWB on is that considered a wash sale because it is substantially identical ?

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