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Wash Rules on Iterative Option Writes?

| | Posted in: Equity Options

A reader asked: “I have seen some writings which suggest that iteratively selling puts, or covered calls for that matter, may trigger wash sale rules, even though expiration dates and probably strike prices would vary. The authors mentioned that the IRS may consider the re-establishment of a short position on the same security as triggering the wash sale rule. Are you aware of any definitive rulings on this issue?”

CXOadvisory.com does not track IRS rulings on asset transactions. IRS rules involving wash sales and options as described in Publication 550 (2008) are complicated.

You might take a look at options on broad stock indexes (those qualifying as section 1256 transactions). IRS Form 6781 states (italics added):

Mark-To-Market Rules

“Under these rules, each section 1256 contract held at year end is treated as if it were sold at fair market value (FMV) on the last business day of the tax year. The wash sale rules do not apply.

Gains or losses on section 1256 contracts open at the end of the year, or terminated during the year, are treated as 60% long term and 40% short term, regardless of how long the contracts were held.”

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