Now this stuff gets ugly! ACK! How can anyone figure this out.....
The main reason for the rule is that you cannot put yourself in the same financial situation within 30 days before or after a sale at a loss. This is why purchasing a call option on a stock could invoke the wash sale rules. The reason I say could invoke is that I would expect one could argue a call option way out of the money could arguably not be a substantially similar position as it may be unlikly that exercise could/would take place.
This is from the same publication. This is the long version of all the info on wash sales. I still don't have an answer on the strike and months of options, but I believe that the main issue there is as it pertains to selling the common and putting yourself in the same position with an option.
-Scott
PS - Isn't tax law fun????? ACK!
-------------
Wash Sales
You cannot deduct losses from sales or trades of stock or securities in a wash sale. Any gain from these sales is taxable as a capital gain.
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
1) Buy substantially identical stock or securities,
2) Acquire substantially identical stock or securities in a fully taxable trade, or
3) Acquire a contract or option to buy substantially identical stock or securities.
If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.
If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities. The result is your basis in the new stock or securities. The effect of this adjustment is to postpone the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period for the stock or securities sold.
Example 1. You buy 100 shares of X stock for $1,000. You sell these shares for $750 and within 30 days from the sale you acquire 100 shares of the same stock for $800. Because you bought substantially identical stock, you cannot deduct your loss of $250 on the sale. However, you add the disallowed loss ($250) to the cost of the new stock ($800) to obtain your basis of the new stock, which is $1,050.
Example 2. You are an employee of a corporation that has an incentive pay plan. Under this plan, you are given 10 shares of the corporation's stock as a bonus award. You include the fair market value of the stock in your gross income as additional pay. You later sell these shares at a loss. If you receive another bonus award of substantially identical stock within 30 days of the sale, you cannot deduct your loss on the sale.
Stock or securities. Under the wash sale rules, stock or securities include contracts or options to acquire or sell stock or securities. They do not include commodity futures contracts and foreign currencies. See Coordination of Loss Deferral Rules and Wash Sale Rules, later under Straddles, for information about the tax treatment of losses on the disposition of positions in a straddle.
Substantially identical. In determining whether stock or securities are substantially identical, you must consider all the facts and circumstances in your particular case. Ordinarily, stocks or securities of one corporation are not considered substantially identical to stocks or securities of another corporation. However, they may be substantially identical in some cases. For example, in a reorganization, the stocks and securities of the predecessor and successor corporations may be substantially identical.
Similarly, bonds or preferred stock of a corporation are not ordinarily considered substantially identical to the common stock of the same corporation. However, where the bonds or preferred stock are convertible into common stock of the same corporation, the relative values, price changes, and other circumstances may make these bonds or preferred stock and the common stock substantially identical. For example, preferred stock is substantially identical to the common stock if the preferred stock:
1) Is convertible into common stock,
2) Has the same voting rights as the common stock,
3) Is subject to the same dividend restrictions,
4) Trades at prices that do not vary significantly from the conversion ratio, and
5) Is unrestricted as to convertibility.
More or less stock bought than sold. If the number of shares of substantially identical stock or securities you buy within 30 days before or after the sale is either more or less than the number of shares you sold, you must determine the particular shares to which the wash sale rules apply. You do this by matching the shares bought with an equal number of the shares sold. Match the shares bought in the same order that you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.
Example 1. You bought 100 shares of M stock on September 21, 1996, for $5,000. On December 21, 1996, you bought 50 shares of substantially identical stock for $2,750. On December 28, 1996, you bought 25 shares of substantially identical stock for $1,125. On January 4, 1997, you sold for $4,000 the 100 shares you bought in September. You have a $1,000 loss on the sale. However, because you bought 75 shares of substantially identical stock within 30 days of the sale, you cannot deduct the loss ($750) on 75 shares. You can deduct the loss ($250) on the other 25 shares. The basis of the 50 shares bought on December 21, 1996, is increased by two-thirds (50 / 75) of the $750 disallowed loss. The new basis of those shares is $3,250 ($2,750 + $500). The basis of the 25 shares bought on December 28, 1996, is increased by the rest of the loss to $1,375 ($1,125 + $250).
Example 2. You bought 100 shares of M stock on September 21, 1996. On February 1, 1997, you sold those shares at a $1,000 loss. On each of the 4 days from February 15, 1997, to February 18, 1997, you bought 50 shares of substantially identical stock. You cannot deduct your $1,000 loss. You must add half the disallowed loss ($500) to the basis of the 50 shares bought on February 15. Add the other half ($500) to the basis of the shares bought on February 16.
Loss and gain on same day. Loss from a wash sale of one block of stock or securities cannot be used to reduce any gains on identical blocks sold the same day.
Example. During 1992, you bought 100 shares of X stock on each of three occasions. You paid $158 a share for the first block of 100 shares, $100 a share for the second block, and $95 a share for the third block. On December 23, 1997, you sold 300 shares of X stock for $125 a share. On January 6, 1998, you bought 250 shares of identical X stock. You cannot deduct the loss of $33 a share on the first block because within 30 days after the date of sale you bought 250 identical shares of X stock. In addition, you cannot reduce the gain realized on the sale of the second and third blocks of stock by this loss.
Short Sales
The wash sale rules apply to a loss realized on a short sale if you sell, or enter into another short sale of, substantially identical stock or securities within a period beginning 30 days before the date the short sale is complete and ending 30 days after that date.
Short sale completed. For purposes of the wash sale rules, a short sale is considered complete on the date the short sale is entered into, if:
1) On that date, you own stock or securities identical to those sold short (or by that date you enter into a contract or option to acquire that stock or those securities), and
2) You later deliver the stock or securities to close the short sale.
Otherwise, a short sale is not considered complete until the property is delivered to close the sale.
Example. On June 2, you buy 100 shares of stock for $1,000. You sell short 100 shares of the stock for $750 on October 6. On October 7, you buy 100 shares of the same stock for $750. You close the short sale on November 17 by delivering the shares bought on June 2. You cannot deduct the $250 loss ($1,000 - $750) because the date of entering into the short sale (October 6) is considered the date the sale is complete for wash sale purposes and you bought substantially identical stock within 30 days from that date.
Residual Interests in a REMIC
The wash sale rules generally will apply to the sale of your residual interest in a real estate mortgage investment conduit (REMIC) if, during the period beginning 6 months before the sale of the interest and ending 6 months after that sale, you acquire any residual interest in any REMIC or any interest in a taxable mortgage pool that is comparable to a residual interest. REMICs are discussed in chapter 1.
Dealers
The wash sale rules do not apply to a dealer in stock or securities if the loss is from a transaction made in the ordinary course of business.
Nondealers. For sales of stock or securities, the wash sale rules apply to all nondealers.
How To Report
Report a wash sale or trade on line 1 or line 8 of Schedule D (Form 1040), whichever is appropriate. Show the full amount of the loss in column (f), and in column (g) if required. On the next line, enter "Wash Sale" in column (a) and the amount of the loss not allowed as a positive amount in column (f), and in column (g) if required. |
