Hi group, an interesting tax question came up at a trading group session the other day: What tax liability am I triggering if I am long, let's say 10 calls, of XYZ, in my traditional IRA and short 10 call spreads of XYZ ( the short legs are a mirror to the long in the traditional IRA and spreads was created using very OTM long calls -- just because I can't have naked calls in an IRA). Now, let's say my longs expire worthless in the traditional IRA but the short premium collected from the spreads in the Roth is all mine. Have I triggered any tax consequences? What if I use options on futures instead of stock? (And yes, I can do all this in my IRAs.)
(You didn't initially say the call spread was in a Roth.)
I see only two potential tax consequences.
The wash sale rules do not apply, as the "suspended" loss is in a non-taxable account.
However, under some circumstances, the transactions might be considered a disguised transfer from the traditional IRS to the Roth. If that is the case, the transactions might be recharacterized as a distribution from the traditional IRA and an illegal contribution to the Roth.
As you probably know, if you have a loss in a personal account and "purchase" the same security in an IRA within 30 days of the "sale date", the wash sale rules apply, but the "suspended" loss is suspended forever. (Which end of the transaction is "purchase" and which is "sale" depends on the nature of the security.)
If you want more detailed advice, contact a tax lawyer or request a letter ruling from the IRS. This seems beyond the level of a CPA or EA, although others on this group may differ.
(You didn't initially say the call spread was in a Roth.)
I see only two potential tax consequences.
The wash sale rules do not apply, as the "suspended" loss is in a non-taxable account.
However, under some circumstances, the transactions might be considered a disguised transfer from the traditional IRS to the Roth. If that is the case, the transactions might be recharacterized as a distribution from the traditional IRA and an illegal contribution to the Roth.
As you probably know, if you have a loss in a personal account and "purchase" the same security in an IRA within 30 days of the "sale date", the wash sale rules apply, but the "suspended" loss is suspended forever. (Which end of the transaction is "purchase" and which is "sale" depends on the nature of the security.)
If you want more detailed advice, contact a tax lawyer or request a letter ruling from the IRS. This seems beyond the level of a CPA or EA, although others on this group may differ. =============== I agree that further research is needed.
I seem to remember that there's a case from the 1930s that says that since the same individual has control over the entities (an S-corporation and a partnership, in the case), that the loss could be subject to the wash sale rule despite the other entity doing the purchase. In combination with that recent ruling by the IRS (with which I personally disagree) that applied a wash sale to an IRA and the individual himself, I see the possibility of the wash sale rule being applied.
If these were the same type of IRA account, I would say that the wash sale applies, because the IRS says in many places that the taxpayer is to treat all IRA accounts of the same type as if it were a single account. However, being of different types, one cannot simply treat them as one account. However, see "controlled group."
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