> Yas, you are missing something. Any time you have a wash sale, not only> do you adjust the cost basis of the investment, you also include the> holding period of the original investment. Thus, any long-term loss> would remain long-term. See IRS Pub. 550, pg. 58, the section on Wash> Sales, the sentence immediately preceding Example 1.Yes, I am aware of this, but on the other hand on page 56 it says:"Option exercised. Your holding period for property you acquire when you exercise an option begins the day after you exercise the option."So it is quite clear, as you pointed out, that the holding period for the option is the same as that for the previously wash-sold stock. However it is not clear whether this holding period should be preserved when this option is later exercised. The pub does not say that the holding period for the option gets rolled into the holding period of the stock acquired through option exercise.
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