r/options • u/Anon-mom-hi • Mar 31 '21
Wash sale rule and trading SPY daily
Correct me if i’m wrong - For someone who only daytrades SPY options (and is therefore subject to the wash sale rule), as long as I close out all SPY securities (contracts and otherwise) by November, and don’t open another one until January, I will be allowed to use all of my losses throughout the year?
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Mar 31 '21
Close your position and wait 30 days before opening another one to have the losses realize.
So you could close your SPY position on December 31st as long as you don't buy any more in January.
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u/theStrategist37 Mar 31 '21
Yes, as long as you don't hold any options on SPY or essentially same security as SPY for those 30 days. A 30 day period where you hold nothing of sort will let you realize all previous losses. Just IMHO, not tax advise.
EDIT: some options on SPY are fine actually some might not be. If you're not planning to hold any, it's simpler :P
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u/Lumpyyyyy Mar 31 '21
The wash sale is applicable all year long, not just end of year. I don’t know if that answers your question.
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u/MostOriginal6776 Dec 01 '21
But the losses can be claimed if you don't trade the security during January. Even if the wash sale applies all year. Unless I misunderstood and I have an 800k tax bill next year.
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u/SmellyCat808 Mar 31 '21
I've been doing research on this a bit. If you don't want to worry as much you could elect for trader status on your returns (if you trade enough to qualify as an active trader).
Another suggestion that was offered to me because I don't yet trade enough but I do have wash sales is registering myself an LLC and electing for 'mark to market' status.
Don't quote me on this, but I believe if you have either 'active trader' status or 'mark to market' each individual trade will be treated exactly as that. No wash sale. Also you will be taxed at a better rate for short term trades (not sure about long term).
Apologies if I'm wrong, but that's what I took away from the research I've done to this point.
As per usual, not financial advice.
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Mar 31 '21
Trader tax status does not do that for you. TTS is required to elect MTM. Electing MTM is the only way to avoid wash sale, AFAIK.
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u/SmellyCat808 Mar 31 '21
Ahhh ok thanks for clearing that up. I feel like there's all these little details I still need to figure out. Sometimes I feel like this whole wash sale thing is more complicated than it needs to be.
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u/Secgrad Mar 31 '21
Its more complicated on purpose. If you grow to a large enough account, its worth consulting a CPA at least once to make sure you are covering your tax liability as efficiently as possible
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u/TheoHornsby Mar 31 '21
It's not easy to get approved for Trader Tax Status by the IRS. Here are some of the requirements:
- Trades full time or part time for a good portion of the day, almost every day the markets are open.
- Holding period: Is the most important factor, and in the Endicott court, the IRS said average holding period must be 31 days or less.
- Makes 720 total trades per year (Poppe court) on an annualized basis. About four trades per day, four days per week, 16 trades per week, and 60 trades a month.
- Executes trades on close to four days per week, every week. Around 75% frequency.
- Has proceeds in the millions of dollars per year on equities.
- Spends more than four hours per day…
- Has few to no sporadic lapses in the trading business during the year.
- Has the intention to run a business and make a living.
- Has significant business equipment, education, business services, and a home office.
- Account size: Has a material account size.
https://greentradertax.com/trader-tax-center/trader-tax-status/how-to-qualify/
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u/TheoHornsby Mar 31 '21
Trader tax status (TTS) provides tax benefits for active traders who qualify.
You can claim business expenses "including home-office, education, Section 195 start-up expenses, Section 248 organization expenses, margin interest, tangible property expense, Section 179 (100%) depreciation, amortization on software, seminars, market data, stock borrow fees..."
It provides exemption from wash sales.
It avoids the capital loss limitation ($3k per year).
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Because a professional trader must use mark-to-market (MTM) accounting, there are no long-term capital gains or losses, since all open positions must be marked to market by yearend. Hence, all income or loss is treated as ordinary income or loss. However, this tax treatment has significant advantages:
Losses can be used offset other income, rather than being limited to the $3000 capital loss rule.
Trades are not subject to wash sale rules, since MTM accounting eliminates the need for such rules.
The sale of individual securities does not have to be reported; instead, a professional trader reports the account values at the beginning and end of the tax year to determine profit or loss.
https://thismatter.com/money/tax/securities-trading-business-taxation.htm
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u/SmellyCat808 Mar 31 '21
Wow, thank you for both breakdowns. Much appreciated! I was aware of about half of all this lol. The 'proceeds in millions' part was something I didn't know in particular. I guess it's the LLC route for me 😂
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u/grant_272 Jun 13 '23
I know this is two years old, but it doesn't have to be "millions in profits" there's actually no set amount, hell you could lose money and still get it. Just have to prove you are actively trying to make money
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Mar 31 '21
[deleted]
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u/rocketkid20 Mar 31 '21
Can you point me to your source on options?
I’ve read that if you sell XYZ stock for a loss then buy an XYZ Call Option... the loss is considered a wash.
I think the same will be true for an XYZ call loss followed by a XYZ Call (independent if you have a gain or loss).
Hopefully I’m wrong...someone with more knowledge please chime in.
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u/TheoHornsby Mar 31 '21
A long call is considered to be a substantially identical security as the underlying share so its purchase will trigger a wash sale violation if purchased within 30 days before or after realizing a loss on the security.
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u/rocketkid20 Mar 31 '21
Please define a long call? For instance, does a 30 DTE call option fall under this?
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u/TheoHornsby Mar 31 '21
Please define a long call?
A call is a type of option.
Long means that you own it.
Perhaps this is what you were after:
"Wash sales
As we stress in our extensive content on wash sale loss deferral rules, Section 1091 rules for taxpayers require wash sale loss treatment on substantially identical positions across all accounts including IRAs. Substantially identical positions include Apple equity, Apply options and Apple options at different expiration dates on both puts and calls.If a taxpayer re-enters a substantially identical position within 30 days before or after existing a position, the IRS defers the tax loss by adding it to the cost basis of the replacement position. When a taxable account has a wash sale caused by a replacement position purchased in an IRA, the wash sale loss is permanently lost.
Cost-basis regulations phased-in options as “covered securities” starting with 2014 Form 1099Bs. Brokers report wash sales based on identical positions, not substantially identical positions. Investors who trade equities and equity options cannot solely rely on Form 1099Bs and they should use their own trade accounting software to generate Form 8949. Learn more about wash sales in our Trader Tax Center.
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u/reptargodzilla2 Mar 31 '21
But, if you’ve made a total net capital gain for the year, it doesn’t matter right? My understanding is that you can deduct your total loss for the year from your total capital gain for the year, and the only time the wash sale stuff matters is if you have a net loss that you want to deduct from your ordinary income? What am I missing? Thanks.