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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121095  
Subject: Re: Converting long-term loss to short-term Date: 4/20/2011 11:54 PM
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I read an old message about converting long-term loss to short-term, so that it can be used to offset short-term gains (which is obviously advantageous). The idea is to sell the depreciated stock at a loss and within the 61-day window buy call options for the same stock. This triggers the wash sale rule which disallows the loss. Then exercise the options. According to IRS pub 550, the holding period for the stock acquired through option exercise starts on the date of exercise. The original cost basis carries through to the new stock, which can now be sold, producing a short-term loss. In principle all this can be done within a few days.

Is there something wrong with this picture? To close the loophole, there could be an exception to the holding period rule which would "remember" that the option was acquired in a wash sale transaction. However, there doesn't seem to be anything in pub 550 to this effect. Am I missing something?


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.

Ira
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