What is a Wash Sale?
A wash sale occurs when you sell a stock or security at a loss and, within 30 days, repurchase the same or a substantially identical security. The Internal Revenue Service (IRS) disallows losses on wash sales to prevent taxpayers from artificially lowering their taxable income. The IRS considers a wash sale to have occurred if you sell a security at a loss and, within 30 days, buy back the same security (or a substantially identical security) with the intention of claiming the loss on your taxes.
Image: www.forbes.com
Stock Options Overview
Stock options give the holder the right, but not the obligation, to buy or sell a specified number of shares of a stock at a specified price on or before a specified date. When you exercise an option to buy a stock (a call option), you are purchasing the right to buy the stock, and you must pay a premium to do so. When you exercise an option to sell a stock (a put option), you are selling the right to sell the stock, and you will receive a premium for doing so.
Wash Sale Rules and Stock Options
The wash sale rule applies to stock options in the same way that it applies to stocks. If you sell a stock option at a loss and, within 30 days, acquire the same or a substantially identical option, the IRS will disallow the loss for tax purposes.
Identifying Substantially Identical Options
The IRS considers stock options to be substantially identical if they have the same underlying security, the same exercise price, and the same expiration date. However, if differing in these terms, the options will not be considered Substantially Same.
Image: www.youtube.com
Avoiding Wash Sales with Stock Options
To avoid wash sales with stock options, wait at least 31 days before purchasing substantially identical options after selling at a loss. You can also avoid wash sales by closing out your position in an option and establishing a new position in a different option with different terms. Avoiding wash sales can save you money on taxes and will maintain accurate tax reporting.
Trading Stock Option And Taxes Wash
Image: thewaverlyfl.com
Conclusion
Understanding the wash sale rule is crucial while trading stocks and options. The wash sales prevent tax manipulation by taxpayers. If you have any questions regarding the wash sales, please consult with a tax professional or certified consultant for further guidance.
