Wash Sale calculation gain/loss question?

Question

Let's say that I buy an option, sell it at a loss, 10 days later I buy an option with the same stock, sell it at a gain, and the gain is larger than the loss of the first option. Does this mean that since, netting the two together, it was a net gain, that it's not covered under the wash rule?

What if the first sale was at a loss, the second sale was at a gain, but the gain was less than the loss, so netted, it was still a loss. Would both transactions be in the wash calculation?

The fairmark.com website states that the wash sale rules only apply to losses, so I know the first 2 answers are incorrect.

Answer 1

If the first trade is a loss and the second trade is initiated within 30 days of the close of the first and is a gain, the loss from the first trade would be applied to the cost basis of the second trade. Since the second trade has a larger gain than the loss from the first trade, the second trade would still end up with a gain. This would be considered a wash sale.

If the gain on the second trade was less than the loss from the first, the loss from the first would be applied to the cost basis of the second and would result in a larger loss for the second. It would also be a wash sale. The loss from the second would not be a wash sale unless another trade was initiated within 30 days of the close of the second trade in which case the loss would be washed to the third trade.

All of this assumes that the same number of shares/contracts was bought/sold in each trade.

Answer 2

The amount of the gain or loss does not matter when determining if the wash sale rule applies.

In your example, you need to decide if the second option you bought was "substantially identical" to the first option you bought and sold for a loss. If so, it was a wash sale. If not, it was not.

For an understandable explanation of the wash sale rules see

http://www.fairmark.com/capgain/wash/index.htm

Answer 3

The wash is not about gain or loss but about the time between trades . Less than 30 days is a wash .
You will add up your losses and gains for the net result.
Check the IRS for the specific calcs

http://www.irs.gov/