- Section 1256 of the Internal Revenue Code grants futures traders preferential tax treatment over stock dealers, resulting in a maximum total tax rate of 26.8%.
- Options have a far more complicated tax treatment than futures, which have long- or short-term capital gains for writers and buyers.
- The wash-sale regulations do not apply to futures traders, but they do to option traders.
Is there a wash sale for ES futures?
Stocks, ETF shares, and equity options are all subject to wash sales laws. Cryptocurrencies and Section 1256 instruments (futures, options on futures, and broad-based index options/cash-settled index options) are exempt from the wash sale requirements.
Why are futures subject to a 60-40 tax?
Take advantage of the 60/40 rule to get lower tax rates on futures trades. This means that 60% of net futures trading gains are considered as long-term capital gains. The remaining 40% is taxed as ordinary income and is treated as short-term capital gains.
Who is exempt from the wash sale prohibition?
For example, suppose you possess 1,000 Yazoo shares and want to sell them before the end of the year to take advantage of a tax-free capital loss in 2021. You don’t want to give up the stock, though. Buying a January 2022 call option for 1,000 Yazoo shares could cost as little as $100, whereas buying 1,000 actual shares could cost $10,000 or more. Let’s say you buy a 1,000-share call option on November 21. Because you successfully avoided the wash sale rule, you can sell your 1,000 Yazoo shares at any time between December 22 and December 31, and claim a tax-saving capital loss on your 2021 return. Because the call option and the stock are deemed essentially identical securities for the purposes of the wash sale rule, wait at least 31 days before selling the Yazoo shares.
To adopt either of these tactics, you must act on or before November 30, 21 in order to have enough time to make a loss sale in 2021 without triggering the wash sale rule.
Let’s say you buy virtually identical securities in your conventional IRA or Roth IRA within 30 days of a loss sell in your taxable brokerage account. Is the wash sale rule triggered as a result of this? Using an IRA to purchase essentially identical assets does, according to the IRS (in Revenue Ruling 2008-5), trigger the wash sale rule. Worse, the IRS says you can’t use the disallowed loss to enhance the tax basis of your IRA. The loss that was not permitted simply vanishes.
Let’s say you sell a stock at a loss and your spouse buys the same stock during the 61-day period. If you file jointly, the wash sale rule would certainly apply. The wash sale rule applies even if you and your spouse file separate returns, according to IRS Publication 550.
The wash sale rule also applies when a corporation that you control buys essentially identical stocks, according to IRS Publication 550.
The wash sale rule does not appear to apply if you sell a cryptocurrency holding for a loss and acquire the same cryptocurrency immediately before or after the loss sale since cryptocurrencies are classified as “property” rather than securities by the IRS. Depending on your holding time, you simply have a standard short-term or long-term capital loss. There’s no need to be concerned about the wash sale rule. This favorable federal income tax treatment is consistent with IRS Revenue Ruling 74-218’s long-standing treatment of foreign currency losses. That’s a good thing, because some people trade cryptocurrencies for a living, and prices may be extremely volatile. Losses are common, and you want to be able to claim any losses you have for tax purposes.
For example, suppose you acquired a cryptocurrency at a high price then sold it at a low price, losing $35,000 in the process. You also had a lot of stock gains in your taxable brokerage company account over the year. Even if you buy back into the same cryptocurrency shortly after the loss sale, you can use the $35,000 loss from the ill-fated cryptocurrency investment to offset part of your stock gains. The wash sale rule does not apply to bitcoin losses. At least for the time being.
However, losses from crypto-related equities, such as Coinbase Global Inc. shares COIN, -1.53 percent, have been a drag on the market.
What happens to the wash sale holding period?
The holding period starts the day after the security is purchased. It will continue until the security is sold or until you dispose of it.
Is there a wash sale for day traders?
Wash sales are frequently made by traders who have no intention of doing so. Investors may try to trick the system by selling at a loss and repurchasing the stock the next day, but traders may do the same thing without having to worry about taxes. Traders sometimes trade the same stocks for days or weeks at a time, unaware that they are actually making non-tax deductible wash sales (in the case of losses).
Do option contracts fall under the wash rule?
In relation to the wash sale rule, options provide two separate types of issues. To begin, if you sell shares at a loss, you can transform the loss into a profit by trading options. Second, losses incurred as a result of the options themselves can result in wash sales.
Buying Call Options
If you sell shares at a loss and buy nearly identical stock during the 61-day wash sale period (which includes the day of the sale, the 30 days before the sale, and the 30 days after the sale), you’ll have a wash sale (and won’t be able to deduct the loss). You’ll also have a wash sale if you engage into a contract or option to buy virtually identical stock within the wash sale period.
For example, suppose you sold 100 shares of XYZ at a loss on March 31. You purchase a call option on XYZ stock on April 10th. (A call option entitles you to purchase 100 shares.) The March 31st sale is a wash sale.
It makes no difference if the call option is in the money or not. This is a built-in rule. You’ll have a wash sale if you buy a call option during this time. Even if you never exercise the option and buy the shares, this is true.
Selling Put Options
You can also sell put options to transform a stock transaction into a wash sale. This is not an automatic rule. It only applies if the put option is deep in the money and there’s no clear cutoff point for when a put option is deep enough in the money to trigger the rule. If it appears, at the moment you sell the put option, that there is no substantial chance it will expire unexercised, the rule applies. In this case, selling the put option is essentially the same as buying the stock.
For example, suppose you sold 100 shares of XYZ at a loss on March 31. You sell a put option on April 10 that gives the holder the right to sell you 100 shares of XYZ at a price significantly higher than the stock’s current market price. The March 31st sale is a wash sale.
Unless the stock price climbs higher than the option price, you share in the upward and downward movement of the stock price as a seller of a deep in the money put option. If the option price is high enough, the chances of this happening are slim, and you’ve merely found another means to keep your stock investment going.
Losses on Options
In 1988, Congress changed the wash sale rule to apply to contracts or options to buy or sell shares or securities. That is, if you terminate an option position at a loss and construct a replacement position inside the wash sale period, you might have a wash sale. The Treasury Department has yet to issue regulations under this rule, leaving a slew of unanswered questions. The question of when one option is essentially identical to another is the most important of them.
Neither I nor anyone else can say how the wash sale rule relates to losses on options until the Treasury decides to release regulations or other advice. However, there is a fair rule of thumb that will tell you when you’re on solid ground and when you’re on thin ice. There’s a potential the IRS will say you had a wash sale if the holdings you acquired during the wash sale period allow you to participate in the identical up and down market swings as the position that caused the loss. If this isn’t the case, you’ll be fine.
Assume you’ve made a loss on a call option you sold. Even if the new call option has a different expiration or strike price, buying another call option on the same stock during the wash sale period may be considered a wash sale. If you buy XYZ stock, the IRS may claim that you made a wash sale, especially if the call was in the money when you sold it. Similarly, if you write a deep-in-the-money put option during the wash sale period, you could have a wash sale.
If you sell a call option at a loss and also write a put option that is at the money or out of the money, you won’t have a wash sale. Although both the long call and short put options are bullish, the short put option does not allow you to participate in the upside.
These observations are solely my opinion, and do not necessarily reflect the views of the IRS or the Treasury. Furthermore, other tax professionals may have a different perspective on this issue. Regrettably, there is no indication that official guidance on these matters will be forthcoming anytime soon.
Is the wash sale applicable to cryptocurrency?
There is no crypto wash sale rule in existence as of December 2021. Digital currency is officially classified as property rather than a security by the IRS. This means you could theoretically sell a cryptocurrency at a loss then repurchase the same coin without having to wait a period of time in between. In addition, you may be able to deduct capital losses or gains from your taxes.
Although this is a benefit for bitcoin investors, there is a caveat. This rule applies to non-securities cryptocurrencies. However, it does not apply to cryptocurrency stocks or funds, of which there are several.
Let’s imagine you bought 100 shares of Coinbase (COIN), a NASDAQ-listed company. You make the decision to sell the shares at a loss. You wouldn’t be able to purchase a “substantially comparable” crypto stock within the 30 days leading up to and following the transaction in order to harvest the loss.
The IRS does not provide a clear definition. Instead, it’s up to investors to figure out what “essentially comparable” means, which might make tax-loss harvesting more difficult because there’s so much gray area. If you’re confused which assets you can buy after selling equities to avoid a wash sale rule violation, consulting a financial expert can help.
Why are futures preferable to options?
- Futures and options are common derivatives contracts used by hedgers and speculators on a wide range of underlying securities.
- Futures have various advantages over options, including being easier to comprehend and value, allowing for wider margin use, and being more liquid.
- Even yet, futures are more complicated than the underlying assets they track. Before you trade futures, be sure you’re aware of all the hazards.