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URL:  http://boards.fool.com/ltlthow-do-options-play-into-the-wash-sale-10068573.aspx

Subject:  Re: Wash Sale & Options Date:  12/23/1997  10:34 AM
Author:  KATinChicagoland Number:  992 of 121572

<<How do options play into the wash sale rules?

I have two scenarios, one a stock & option interaction, another just options w/ options.

1) Are options treated as "like" securities with stocks? If I sell some stock at a loss and buy options,
is that treated as a wash sale also?>>

As Roy points out, the wash sale rules apply if you sell stock and buy options on identical stock--not because options are "like" stocks, but because the rules explicitly apply the wash sale rule when you either buy substantially identical stock or securities or enter into a contract or option to buy such stock.

<<If so, would I just increase the cost-basis of the
purchased options?>>

Yes.

<<2) I buy and sell Nov expiration calls at a loss.
Within the 30 days, (when the Nov would expire anyways) I purchase some Feb calls. Is this a
wash sale? >>

Let me back up here. If you sell your Novembers at a loss and then buy identical Novembers again within 30 days, it's clear the wash sale rule applies. Congress amended the wash sale rule in 1988 to assure this result. The rule applies "except as provided in regulations," so the fact that there are no regulations does not prevent the rule from applying.

Now let's go to your example. You sell Novembers and buy Februaries. Or you buy Novembers on the same stock but with a different strike price. Does the wash sale rule apply?

As Roy says, it isn't clear in the absence of regulations. But I have little doubt the IRS would take the view it does apply, even though the options themselves may not be substantially identical. I say this simply because a contrary conclusion would provide an opportunity to beat the wash sale rule:

1. Sell XYZ at a loss.

2. Immediately buy XYZ November calls, as deep in the money as possible. Wash sale rule applies.

3. Wait 31 days, then sell November calls and immediately buy February calls, also deep in the money. Assume the wash sale rule doesn't apply.

4. Wait 31 days, then exercise the February calls, or sell them and buy the stock.

At the end of all this you are in the stock without ever having really been out, and you have recognized your loss. If you think this works, try it at your own risk. Probably some people are doing it. I expect the IRS would challenge this if they found it. Whether they would win in court is another question. They might not--but then again, they might.

One more point. What if you simply let the Novembers expire, then buy Febs within the wash sale period? Expirations are treated like sales for some purposes at least, and it's possible the wash sale rule applies here, too. Again, the point is debatable, and tax professionals may reasonably disagree concerning the amount of risk.

KAT in Chicagoland
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