The Tax Rule That Erases Your Options Losses
You closed a losing spread in December, right on schedule, to book the loss against your gains.
Then your 1099-B shows up and the loss is gone — disallowed, not deducted.
The wash sale rule doesn't care that the trade made sense. It cares about the calendar, and it applies to options exactly the way most traders assume it doesn't.
What actually triggers it
Section 1091 disallows a loss if you sell a security at a loss and buy the same or a "substantially identical" one within a 61-day window: 30 days before the sale, the day of, and 30 days after.
Options sit fully inside that rule. Sell a losing call at a loss, buy a similar call on the same stock 12 days later, and the deduction can vanish — even though you never touched a share of the underlying.
"Substantially identical" is a judgment call, not a formula
- Same strike, same expiration, same underlying, repurchased inside the window: treated as substantially identical, loss disallowed.
- A deep-ITM option that behaves almost like stock, bought to replace a stock position you just sold at a loss: can also count, because it replicates the same economic exposure.
- A different strike or a different expiration on the same name: gray area. The IRS test is facts and circumstances — there's no bright-line "20% away is safe" rule the way there sometimes is for convertible bonds or preferred shares.
Rolling is often a wash sale wearing a different name
Rolling a losing position down and out to give it room is common — but mechanically, it's closing one contract at a loss and opening a new one on the same underlying, frequently inside the 61-day window. If the new strike and expiration are close enough to count as substantially identical, the loss on the leg you closed gets disallowed and folded into the basis of the new position instead of being usable on this year's return.
A wash sale doesn't erase your position — it erases your ability to claim the loss this year. Whether you get it back later depends entirely on which account the replacement lands in.
Three surprises that catch experienced traders
- It follows you across accounts. Buying the replacement in a spouse's account, a joint account, or an IRA can trigger a wash sale on a loss realized in your individual taxable account. Brokers only track wash sales within a single account on the 1099-B — nothing on your statement flags account two.
- Inside an IRA, the loss doesn't come back. In a taxable account, a disallowed loss gets added to the replacement position's cost basis, so you eventually recover it when you sell for good. Per IRS Revenue Ruling 2008-5, if the repurchase happens inside an IRA, the loss is permanently disallowed — there's no basis bump inside the IRA to claim it later.
- The window is 61 days, not 30. Traders remember "30 days" and forget it counts both directions plus the day of the sale. A repurchase 25 days before the loss-generating sale counts just as much as one 25 days after.
The one corner of the options market that's exempt
Section 1256 contracts — options on broad-based indices (SPX, NDX, RUT, VIX), plus futures and futures options — are carved out of the wash sale rule entirely.
They get 60/40 tax treatment (60% long-term, 40% short-term capital gains, regardless of how long you actually held the position) and are marked to market on the last trading day of the year. A losing 1256 position can be closed and reopened the very next day without losing the deduction.
The distinction that trips people up: SPX and NDX options qualify for this treatment. SPY and QQQ options — ETFs, not the index itself — trade as ordinary equity options and remain fully subject to the wash sale rule. Same market exposure, very different tax plumbing.
A before-you-close routine
- Before harvesting any options loss for tax purposes, check whether you, a spouse, or an IRA already holds — or plans to buy — anything similar on that underlying inside the surrounding 61 days.
- If you want to stay exposed to the name, don't reopen a similar strike and expiration inside the window. Switch to a genuinely different underlying, or wait the 31 days if there's no urgency to re-enter.
- Never let the repurchase land in an IRA. If a wash sale is going to happen anyway, keep it inside the same taxable account, where the loss is deferred into basis instead of destroyed outright.
- Track disallowed losses yourself. They add to the cost basis of the replacement position — losing track of that adjustment at tax-prep time is its own way to erase the deduction a second time.
This is a description of how the rule works, not tax advice. The substantially-identical test is applied case by case, broker wash-sale flags on the 1099-B are frequently incomplete across multi-account or spousal households, and getting the call wrong risks an IRS notice, not just a smaller refund. Confirm your specific situation with a CPA before relying on any loss for this year's return. For a related tax wrinkle on the equity side, see how a collar can trigger the constructive sale rule.
The takeaway
The trade can be exactly the loss you thought it was. The deduction is a separate transaction, governed by a calendar you have to manage yourself, across every account with your name on it.
Before you close your next losing options trade for the write-off, do you actually know whether anything similar is already sitting inside 30 days on either side of it — in every account you hold?
Options involve substantial risk and are not suitable for every investor. Nothing in this article is a recommendation to buy or sell any security, and nothing in it is tax advice. Before trading options, read the OCC's Characteristics and Risks of Standardized Options.