Wash Sale Rule and Options

The wash sale rule prevents investors from selling a security at a loss and then immediately repurchasing it (or something substantially identical) just to claim the tax deduction. Options interact with this rule because buying a call is economically similar to buying the underlying stock.

What Is the Basic Wash Sale Rule?

A loss on the sale of stock or securities is disallowed if the taxpayer acquires substantially identical stock or securities within the 61-day window:

• 30 days before the sale
• The day of the sale
• 30 days after the sale

When a wash sale is triggered:

• The disallowed loss is added to the cost basis of the replacement security
• The holding period of the original position tacks onto the replacement position
• The loss is not permanently lost; it is deferred into the new position

Example: You sell 100 shares of XYZ at a $1,000 loss on March 15. On April 1 (within 30 days), you buy 100 shares of XYZ.

• The $1,000 loss is disallowed for the current year
• Your cost basis in the new shares increases by $1,000
• Your holding period includes the time you held the original shares

Exam Tip: Gotchas

• The wash sale window is 61 days, not 30. It covers 30 days before, the day of, and 30 days after the sale. A common wrong answer treats it as only 30 days after.
• The loss is not permanently lost. It is deferred into the replacement position's cost basis. A common misconception is that the loss disappears entirely (it does not).

How Do Options Trigger Wash Sales?

An option is considered substantially identical to the underlying stock for wash sale purposes. These scenarios trigger a wash sale:

• Sell stock at a loss, buy a call on the same stock within 30 days
• Sell stock at a loss, buy a deep-in-the-money call on the same stock (most likely trigger; acts almost identically to owning stock)
• Sell stock at a loss, write a deep-in-the-money put on the same stock (obligation to buy acts like stock ownership)

Example: You sell 100 shares of ABC at a $2,000 loss on June 10. On June 25 (within 30 days), you buy 1 ABC call option.

• This IS a wash sale
• The $2,000 loss is disallowed
• The disallowed loss is added to the cost basis of the call option

Exam Tip: Gotchas

• Buying a call on the same stock within 30 days of selling at a loss IS a wash sale. Options are considered substantially identical to the underlying stock for wash sale purposes.

What Does NOT Trigger a Wash Sale?

• Selling stock at a loss and waiting more than 30 days to buy calls
• Selling stock at a gain and buying calls (wash sales only apply to losses)
• Selling stock at a loss and buying stock in a different company (not substantially identical)

Are Marked-to-Market Contracts Subject to Wash Sales?

Contracts that get the 60/40 marked-to-market treatment are generally NOT subject to the wash sale rule. This is an additional tax advantage of trading:

• Broad-based index options
• Foreign currency options
• Yield-based options

You can sell an S&P 500 index option at a loss and immediately buy another S&P 500 index option without triggering a wash sale.

Exam Tip: Gotchas

• Equity options are subject to wash sales; 60/40 marked-to-market contracts are generally not. If a taxpayer sells stock at a loss and buys a call on the same stock within 30 days, this IS a wash sale. But selling and rebuying an S&P 500 index option (a marked-to-market contract) would generally not trigger one.

What Should You Check on Exam Day?

• Can you count the wash sale window correctly as 61 days (30 before, the day of, 30 after), not just "30 days after"?
• Do you know an option is treated as substantially identical to its underlying stock, so buying a call within the window on stock just sold at a loss triggers a wash sale?
• Can you correctly identify that marked-to-market non-equity contracts (broad-based index, foreign currency, yield-based) are generally exempt from the wash sale rule?