I am not sure if we're saying the same thing. I now think if the put is out-of-the-money, it should not run afoul of the wash-sale rule.
IRS ruled that for purposes of the wash sale rule the put sold is in substance a contract to acquire substantially identical stock to that sold by the taxpayer. Therefore, the loss on the stock sale is not deductible.
Rev. Rul. 85-87, 1985-1 CB 268 -- IRC Sec. 1091
Sec. 1091 -- Loss From Wash Sales of Stock or Securities
26 CFR 1.1091-1: Losses from wash sales of stock or securities.
HEADNOTE:
Sale of stock and "put" options; losses on stock; disallowance.
A loss on the sale of corporate stock, otherwise allowable under section 165, is disallowed under section 1091, if, within 30 days of the sale of stock, the taxpayer sold an "in-the-money" put option with respect to the stock and, based on the objective factors at the time the put was sold, there was no substantial likelihood that the put would not be exercised.
Text:
Rev. Rul. 85-87, 1985-1 CB 268 -- IRC Sec. 1091
ISSUE
Is a loss on the sale of corporate stock, otherwise allowable as a deduction under section 165 of the Internal Revenue Code, nondeductible under section 1091 of the code if, under the facts described below, a taxpayer sells an "in-the-money" put option with respect to the stock within 30 days of the date of the sale.
Rev. Rul. 85-87, 1985-1 CB 268 -- IRC Sec. 1091
FACTS
On December 3, 1984, A, an individual, sold 100 shares of X corporation stock and realized a loss with respect to the shares. On December 4, 1984, A sold a put option obligating A to buy 100 shares of X corporation stock prior to February 1, 1985, at a particular price (the "exercise price") if the holder of the put option exercised the option. When the put was sold by A, the market price of the stock was substantially less than the exercise price of the put. In light of the spread at the time the put was sold between the value of the underlying stock and the exercise price of the put, the term of the put, the premium paid, the historic volatility in the value of the stock, and other objective factors, there was, at that time, no substantial likelihood that the put would not be exercised. Because the fair market value of the stock at the time the put was sold was less than the exercise price of the put, the put option sold by A is referred to as an "in-the-money" put.
Rev. Rul. 85-87, 1985-1 CB 268 -- IRC Sec. 1091
LAW AND ANALYSIS
Section 165(a) of the Code generally provides that a deduction is allowed for any loss sustained during the taxable year that is not compensated for by insurance or otherwise.
Section 165(c) of the Code provides that in the case of an individual the deduction under section 165(a) is limited to losses incurred in a trade or business; losses incurred in any transaction entered into for profit, though not connected with a trade or business; and certain casualty losses.
Section 1091(a) of the Code provides, in part, that in the case of any loss claimed to have been sustained from any sale of shares of stock where it appears that, within a period beginning 30 days before the date of such sale and ending 30 days after such date, the taxpayer has acquired, or has entered into a contract or option so to acquire, substantially identical stock, then generally no deduction for the loss is allowed under section 165.
The substance, rather than the form, of a transaction in which a taxpayer is involved governs the tax consequences of the transaction. In the instant case, at the time the put was sold there was no substantial likelihood that the put would not be exercised. Thus, for purposes of section 1091(a), the put sold by A is in substance a contract to acquire stock.
Rev. Rul. 85-87, 1985-1 CB 268 -- IRC Sec. 1091
HOLDING
Any loss resulting from the sale of X corporation stock by A, otherwise allowable as a deduction under section 165 of the Code, is nondeductible under the provisions of section 1091. |
