Options as a Tax Loss Harvesting Tool

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acanthurus
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Options as a Tax Loss Harvesting Tool

Post by acanthurus » Wed Aug 09, 2017 8:59 pm

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Doc
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Re: Options as a Tax Loss Harvesting Tool

Post by Doc » Thu Aug 10, 2017 2:22 pm

Doesn't work.

The IRS has remained mute on what substantially identical is when mutual funds are involved. Not the same with stocks. There are published "rules". The sale of a stock and an option to buy the same stock are substantially identical.

See for example http://fairmark.com/capgain/wash/wsoption.htm
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acanthurus
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Re: Options as a Tax Loss Harvesting Tool

Post by acanthurus » Thu Aug 10, 2017 4:55 pm

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Re: Options as a Tax Loss Harvesting Tool

Post by Doc » Thu Aug 10, 2017 5:11 pm

acanthurus wrote:My understanding is you are then free to re-purchase the stock/ETF immediately after entering the option contact with the new share's cost basis being the same as the market price with no wash sale adjustment (since the wash sale cost basis adjustment all went towards the option contract).
Getting above my paygrade. I did miss your point and maybe still do.

1) The purchase of the buy option creates the wash sale and the cost basis of the option is adjusted upwards. If the option expires you get the lost. If you exercise the option the cost of the shares is increased by the previous lost.

2) If you buy additional shares and the option is exercised or expires with 30 days the loss chains. Maybe?

Its way, way above my paygrade. Maybe someone else will chime in. I will not be any help.
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acanthurus
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Re: Options as a Tax Loss Harvesting Tool

Post by acanthurus » Fri Aug 11, 2017 12:54 pm

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Re: Options as a Tax Loss Harvesting Tool

Post by Doc » Fri Aug 11, 2017 4:23 pm

acanthurus wrote: I'm kind of hoping an accountant clicks on this thread and can educate me
This is probably too far in the weeds for most accountants.

I'll stay with my two pair trades: Sell xyz.1 and buy short bonds in taxable and sell intermediate bonds buy xyz.2 in tax advantaged. Reverse in 30 days.
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not4me
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Re: Options as a Tax Loss Harvesting Tool

Post by not4me » Sat Aug 12, 2017 9:46 am

acanthurus wrote:
Fri Aug 11, 2017 12:54 pm


Putting some numbers on this, if you had a loss on SPY today

I'm kind of hoping an accountant clicks on this thread and can educate me :wink:
1st, I'm not an accountant. But I think this is an area where you'll have to be very, very specific in the scenario. Your example was for SPY. I believe that a call option for an index etf is treated differently than for an individual stock. The option would cover a multiple of 100 shares & you'd have to sell the exact number to match the option OR pro-rate which shares were part of the wash sale (I believe).

I'm not attempting to be comprehensive, but rather paint a picture of some of the considerations. I'd be more apt to use this as a tactic than a strategy. I'd also like to hear fomr someone who knows & can educate me along with you!

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Re: Options as a Tax Loss Harvesting Tool

Post by Doc » Sat Aug 12, 2017 10:42 am

not4me wrote:
Sat Aug 12, 2017 9:46 am
Your example was for SPY. I believe that a call option for an index etf is treated differently than for an individual stock. The option would cover a multiple of 100 shares & you'd have to sell the exact number to match the option OR pro-rate which shares were part of the wash sale (I believe).
I don't think the ETF is treated differently in the option scenario it just hasn't been clarified if two funds following the same index are substantially identical. Selling shares of one S&P 500 ETF and buying an option on another S&P 500 ETF is in the "unsettled" region.

On the unmatched shares subject: I think you mean that if the sale was for 50 shares the option cost would be adjusted for the entire loss but if the sale was for 200 shares only the loss on 100 shares would be used for the adjustment. I belive that is correct and is well documented.
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Re: Options as a Tax Loss Harvesting Tool

Post by not4me » Sat Aug 12, 2017 12:17 pm

Doc wrote:
Sat Aug 12, 2017 10:42 am

I don't think the ETF is treated differently in the option scenario it just hasn't been clarified if two funds following the same index are substantially identical.
I started by saying I'm not an accountant & then proceeded to prove such. But for further clarification on my part, I quickly looked up about the options on indexes. There are so, so many distinctions that I wouldn't be surprised if I'm overlooking the obvious. I'll try & cut/paste from IRS Pub 550 -- admittedly likely taking a bit out of context. But, it's enough of a consideration for me that I wouldn't dismiss it out of hand.

First excerpt & I'll add underline:
Puts and Calls
Puts and calls are options on securities and are covered by the rules just discussed for options. The following are specific applications of these rules to holders and writers of options that are bought, sold, or “closed out” in transactions on a national securities exchange, such as the Chicago Board Options Exchange. (But see Section 1256 Contracts Marked to Market , earlier, for special rules that may apply to nonequity options and dealer equity options.) These rules are also presented in Table 4-3.
Then, 2nd excerpt:
Nonequity option. This is any listed option (defined later) that is not an equity option. Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. A broad-based stock index is based on the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index).
If my mistake isn't easy to explain, don't bother. But I am curious as to where I got off track

acanthurus
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Re: Options as a Tax Loss Harvesting Tool

Post by acanthurus » Sat Aug 12, 2017 12:51 pm

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Re: Options as a Tax Loss Harvesting Tool

Post by Doc » Sat Aug 12, 2017 12:51 pm

not4me wrote:
Sat Aug 12, 2017 12:17 pm
If my mistake isn't easy to explain, don't bother. But I am curious as to where I got off track
I don't think you made a mistake.

Selling 100 shares of GM at a loss and buying an option to buy 100 shares of GM within 30 produces a wash sale.

Selling 100 shares of SPY at a loss and buying the 100 shares of SPY within 30 days produces a wash sale.

Is selling 100 shares of SPY and buying the VOO within 30 days a wash sale? We don't know. There has been no IRS rulings. The only ruling involves that the broker must report such a sale if the cusip numbers are the same which in this case they are not.

Now instead of buying VOO you buy an option on the S&P 500. ???
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Re: Options as a Tax Loss Harvesting Tool

Post by Doc » Sat Aug 12, 2017 12:58 pm

acanthurus wrote:
Sat Aug 12, 2017 12:51 pm
The NASDAQ article in my original post seems to indicate (in the section under "Harvesting ETF Losses") that an index ETF such as SPY and an option on the index itself such as SPX would create a wash sale. But I'm not a tax guy either so.... :?
A partner at Deloitte suggested to us a three-step process to take a loss while not substantially disturbing alpha.

Step 1: Sell XYZ for a $15 loss.
Step 2: Buy the call option for $3.
Step 3: Buy back the stock.

...

Obviously, the order in which these trades are executed is very important; it might even be best not to buy the stock back until the next day, in order to avoid any possible confusion.
I think you may have to wait 30 days or the loss "chains".
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not4me
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Re: Options as a Tax Loss Harvesting Tool

Post by not4me » Sat Aug 12, 2017 1:10 pm

Doc wrote:
Sat Aug 12, 2017 12:51 pm
not4me wrote:
Sat Aug 12, 2017 12:17 pm
If my mistake isn't easy to explain, don't bother. But I am curious as to where I got off track
I don't think you made a mistake.

Selling 100 shares of GM at a loss and buying an option to buy 100 shares of GM within 30 produces a wash sale.

Selling 100 shares of SPY at a loss and buying the 100 shares of SPY within 30 days produces a wash sale.

Is selling 100 shares of SPY and buying the VOO within 30 days a wash sale? We don't know. There has been no IRS rulings. The only ruling involves that the broker must report such a sale if the cusip numbers are the same which in this case they are not.

Now instead of buying VOO you buy an option on the S&P 500. ???
I think neither of us are anticipating using this & are basically in agreement. But, I'm not sure I got my point across from the 1st post...
not4me wrote:
Sat Aug 12, 2017 9:46 am
I believe that a call option for an index etf is treated differently than for an individual stock.
Going back to having the example where you sell SPY & then buy an option on SPY...my point was that because it is considered nonequity then it is different that if he had sold shares of GM & then bought option on GM. I'm not sure what all those differences are. I believe there may be considerations for if it is held over the end of year as an example. So even IF OPs original thought was correct, it might have some gotchas hidden in it if not thoroughly understood. I think OP is trying to flesh out finer points where the original article may have cut a few corners. Those who write articles are rarely around when trying to do taxes & better to find out now

acanthurus
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Re: Options as a Tax Loss Harvesting Tool

Post by acanthurus » Sat Aug 12, 2017 1:38 pm

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Re: Options as a Tax Loss Harvesting Tool

Post by Doc » Sat Aug 12, 2017 2:27 pm

not4me wrote:
Sat Aug 12, 2017 1:10 pm
Going back to having the example where you sell SPY & then buy an option on SPY...my point was that because it is considered nonequity then it is different that if he had sold shares of GM & then bought option on GM. I'm not sure what all those differences are.
I'm getting option data from CBOE and Nasdaq for both SPY and GE if that means anything.

(Actually I just got Google hits on things like "option on ge stock nasdaq" but I didn't look at them.)
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Re: Options as a Tax Loss Harvesting Tool

Post by not4me » Sat Aug 12, 2017 2:36 pm

acanthurus wrote:
Sat Aug 12, 2017 1:38 pm
In any case, it seems these intentionally generated wash sales would have to be self-reported, since brokerages aren't required to report the wash sale unless it involves the identical security as opposed to the option.
I hadn't really thought about what the broker would be reporting to the IRS until your last post. Assuming the broker does NOT identify as a wash sale, won't it "mis-report" on the option & subsequently bought asset? (I guess this is assuming covered shares) I had wondered about where a sweet spot may be for the option price/expiration. Somewhat may depend as well on commissions involved.

Sounds like you (& your doughnuts) have a good approach &I'd be interested in hearing results even if I'm skeptical that I'd go to the trouble. Thanks for raising as it may be an interesting tool for certain instances

jbolden1517
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Re: Options as a Tax Loss Harvesting Tool

Post by jbolden1517 » Sat Aug 12, 2017 4:16 pm

acanthurus wrote:
Wed Aug 09, 2017 8:59 pm
I only recently became aware of the wash sale avoidance strategy described in the following links. Since tax loss harvesting seems to be a popular topic, and since options are not frequently discussed here, I thought this might be of interest to some.

The general idea is to sell your stock/index ETF at a loss and immediately buy a low cost (read: out of the money) call option. This purchase of the call option creates a wash sale, and the original loss will be applied to the cost basis of the option contract. You are now free to immediately re-buy the original stock, as the stepped up basis from the wash sale is contained entirely in the option contract.

This eliminates the need for any TLH "pairs", and you can always be invested in whatever your preferred stock or ETF product is.

http://www.nasdaq.com/article/strategie ... e-cm541288

http://www.investmentnews.com/article/2 ... -sale-rule
I think the IRS is going to see through that. But if you change the contract enough they likely won't. They can of course always go back after the fact and change their mind and disallow stuff. But fine then you pay the tax. The rules are ambiguous so they don't need to deal with all the complications. So for example sell VTI do what you are talking about with a VTI out of the money call. And then also buy an in the money call on SCHB. That's going to get too confusing for them. Big thing to remember is you don't want to be paying a lot of theta so make sure that close to 100% of the option is intrinsic value.

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