Wash Sales Between Stocks and Options

Today's active trader has many different trading instruments available to him, and many traders often use a combination of these instruments.  Once such combination is trading both stocks and options on stocks.  Buying and selling a certain stock and then buying an option on the same underlying stock may seem to be two separate and distinct transactions, but the IRS may choose to differ when it comes to what triggers a wash sale.

The IRS uses the phrase "substantially identical" when it discusses what triggers a wash sale.

IRS publication 550 page 56 states in part:

What this means for the stock and options trader is that if you take a loss on a stock or an option, and then buy back that same stock, or an option on that same stock, whether the option is the same month and strike price or not, you have a wash sale.  The same holds true if you close an option position for a loss and then buy the same underlying stock within the 30 day window.

There is no clarification in the tax law as to how far "in or out of the money" the option is, or what month and year the option expires.  So TradeLog™ simply applies this rule as follows: If the underlying stock is the same, then the option is "substantially" the same.

TradeLog™ and Option Trades as reported by Online Brokers

There is absolutely no standards as to how your brokerage reports stock option trades.  Some brokers simply use an option symbol which changes from year to year.  Other brokers report these with varying descriptions such as including the underlying stock ticker or description, the expiration month and year (some do not specify the year which is a problem for leaps), the strike price, and whether it was a put or a call.

If there is enough information in the online trade history reports that get imported, TradeLog™ will describe option trades with the long hand notation of the underlying stock symbol, followed by a space, followed by the expiration month and year, followed by a space, followed by the strike price, followed by a space, followed by the word "PUT" or "CALL."  This makes it very easy to spot option trades when viewing your trades in TradeLog as well as allowing us to match stock and option trades on the same securities for wash sale calculations. 

ex: "MSFT DEC04 45 CALL"

If your broker does not provide enough information to properly identify the option as described above, or if only the option ticker symbol is available in the trade history, then TradeLog cannot possibly match these to the underlying stock.  This is one of the problems in this industry where absolutely no standard exists for trade history reporting beyond the basics included in the brokerage 1099.

How does the wash sale rule affect an IRA? Learn more.