Options Theory: The Wash Sale Rule
May 12, 2022
Today’s video explains the wash sale rule, tax loss harvesting, and how options fit or don’t fit into the topic.
Notes
The wash-sale rule prohibits selling an investment for a loss and replacing it with the same or a “substantially identical” investment 30 days before or after the sale. If you do have a wash sale, the IRS will not allow you to write off the investment loss which could make your taxes for the year higher than you hoped.
Buy 100 shares AAPL stock for $100
Sell 100 shares AAPL stock on May 12, 2022 at $80.
Captured a loss of $2,000.
If in the next 30 days, I rebuy AAPL stock, it is a wash sale.
May 15th, 2022 Re-buy AAPL for $80, proceeds to runup to $100 again. Unrealized gain of $2,000
Account value is now the same as at the beginning.
Account value hasn’t changed, but I was able to capture/realize a $2,000 loss along the way.
Buy May $100 Apple call option
Sell it for a loss of $300.
Buy a new June $105 Apple call option
Sell it for a gain of $500.
Up $200 on the account. $200 short-term capital gains.
Tax Loss harvesting.
Strategically sell holdings at a loss to realize the loss and replace that with a similar but not substantially identical stock so that when the market recovers, you participate but you captured the loss in the meantime.
Long SPY at $100
Falls to $70 and I sell it. $30 loss ($3k loss on 100 shares)
Buy a different large-cap ETF with a high degree of correlation to SPY, thus ensuring that I make money when SPY recovers.
You must find a PAIR of highly correlated tickers that can be used back and forth to capture losses but ensure you participate when the stock recovers. Have to wait 30 days between harvesting opportunities
Sold SPY at a loss on May 12th, Buy IVV. Hold IVV for at least 30 days before I sell it and re-buy SPY.
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