Tax reporting of wash sale on covered call straddle?

Question

I wrote covered calls against a stock that I own (with a short-term holding period). The calls were not "qualified" because I wrote them less than 30 days before expiration. I later closed the position by repurchasing the calls at a loss.

A few days later, I wrote more covered calls (with a later expiration date) against the same stock. I believe this makes the previous transaction a "wash sale" and that I can't claim the loss, but must add it to the basis of the new position.

The question is do I report anything on my tax return for the wash sale transaction? If so, what do I put on which form (Schedule D?, 6781?) and how do I indicate it's a wash sale?

This transaction is a straddle since it is an offsetting position to the stock I hold. There are special rules for straddles described in Pub. 550 , but I'm having trouble interpreting them and determining what I need to report on Sched. D, Form 6781, or if I need to report it anywhere.

Answer 1

You would report the sale as normal on Schedule D with a purchase date, a sell date, a basis, and a sales price, also you will net the basis and the sales price to show the loss.

In the line below that write in "Wash Sale" than add the loss as a positive number in column F to net them both items to $0.

You are also correct that you will add the loss to your basis of the new purchase.

Answer 2

It is a straddle and should be entered on Form 6781. The results of the calculations on Form 6781 get transfered to Schedule D.

The second set of calls you sold were a successor position as described on page 60, column 1 of Publication 550.

All three positions positions need to be entered on Form 6781.

If you had an unrealized gain on EITHER the second covered calls OR the underlying stock, OR both, at the end of the year, and that gain exceeded your loss on the first set of calls, you must carry the entire loss forward into the next year. If the loss exceed the unrealized gain, you will be able to claim the portion of the loss that exceeded the gain on Schedule D and carry the remainder of the loss to the next year.

Because it is a straddle the wash sale rules do not apply directly. Instead you use the "loss deferral rules" (Page 59, column 3).

In determining the holding period, be sure to read the section of Publication 550 beginning on page 60, column 3.

Off-topic comment:

As hard as it may be to believe, the Publication 550 language on straddles has actually been made clearer than it was five years ago, but I still find the use of "substantially identical" in the wash sale rule offensive.

Answer 3

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