Thread - I have a question regarding taxes that I was wondering if the more options-and-tax learned among you might help me with, or point me to a source that might be authoritative. It concerns the wash-sale rule. Consider this situation:
You own (let's say) 1,000 shares of stock, all at a substantial loss to your buy-in price.
You sell 500 shares for a tax loss of, say, $10,000.
With the remaining 500 shares, you write covered calls, with 3 months to expiration, for which you receive a premium of, say $4/share. (Let's say the current price of the stock is $22, and the strike price is $20). So you collect $2000 profit from writing the calls. Your stock might be called away if it's in the money at the expiration, so you could end up selling the stock, but again it'd be for a loss.
Question: By selling the stock for a loss, but *selling* covered calls for a profit (the premium) within a 30 day period, have you violated the 30 day wash-sales rule, so that your $10,000 tax loss is invalidated? Or since you haven't *bought* any stock, or options (only *sold* or wrote options), is this a valid transaction?
2nd Question: Suppose, after making these two transactions, the price of the stock falls, and the premium for the strike price also falls, let's say to $2.50/share. You want to hang on to your stock for whatever reason, so you buy back 5 contracts of covered calls (i.e., 500 shares of stock) for 1/2 of what you sold them for. If this occurs within 30 days of your having originally sold the first 500 shares for a loss, does this violate the 30 day wash-sale rule? That is, would the IRS interpret this as having bought the stock within 30 days of having sold it at a loss, or would it be interpreted as you simply closing out your options position, and since you actually hadn't *bought* any shares you didn't already own, the rule wouldn't apply?
Let me thank all responders in advance for sharing their knowledge with me - it's pretty complex stuff and talking to the IRS people about this is like talking to the guys who couldn't get the job at Burger King, in terms of clarity and understanding.
jamok99 |
