Advantage Play against the IRS - totally legal

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this is less likely to be useful this year since stocks have been booming but still may be if you are prone to buying risky stocks or mutual funds

if you're not prone to doing this it may be useful in later years


if you own a stock that has gone down in value, you can sell it and claim a capital loss for any given year of up to $3,000

but what if you still wanted to keep that stock, you think it will go up or way up in the near future?

ideally, you would like to sell the stock one day and re-buy it on the next day so you can claim your capital loss

but you can't - because the IRS has a "wash" rule - which means that:


"A wash sale occurs when you sell or trade securities at a loss and within 30 days before or after the sale you:

Buy substantially identical securities,

Acquire substantially identical securities in a fully taxable trade, or

Acquire a contract or option to buy substantially identical securities.

Internal Revenue Service rules prohibit you from deducting losses related to wash sales. For more information about wash sales, read IRS Publication 550, Investment Income and Expenses (Including Capital Gains and Losses)."


this would seem to prevent you from taking advantage due to the "wash" rule

but here are the ways you can still potentially take advantage:

you can sell it and wait for more than 30 days and then re-buy it which means you are taking a gamble - you could gain if the stock went down in that period or you could lose if you missed out and the stock went up during that period - since this should much of the time be considered as a "zero sum" gamble you actually have still taken advantage of the situation

or better yet:

you can buy a very similar security that is likely to move in tandem with the security you have just sold. the IRS only forbids "substantially identical" securities from being purchased. they do not clearly define what that means, but I believe it is fairly easy to make a judgement as to what they will or won't allow - see the link from Schwab

you can then re-buy your preferred security after 30 days and at the same time sell your less preferred security


https://www.schwab.com/resource-cent...-on-wash-sales

How this that an advantage play?

You can’t predict future stock prices. If you could predict future stock prices then you would be rich as f*ck.

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Originally Posted by Ex-AP

How this that an advantage play?

You can’t predict future stock prices. If you could predict future stock prices then you would be rich as f*ck.

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the play has nothing to do with predicting stock prices

I consider it an advantage play because the IRS has through their "wash" rule prevented you from selling a stock and claiming a capital loss and then buying the stock right back one minute later

but as indicated in my post they can't prevent you from essentially getting the same benefit - because in the one instance if you gamble and buy it back after 30 days that is a zero sum gamble - so you still gained by being able to claim the capital loss

in the other example, which is a better strategy, you can buy a substantially similar security immediately after the sale - such as selling an index fund that tracks the S&P and buying one or an ETF that tracks the DOW - at the same time without waiting 30 days

very likely that those 2 securities would mirror each other for 30 days and I don't believe the IRS can call them "substantially identical" - the author of the Schwab link agrees

there are many, many other examples of this

the "advantage" is being able to claim the capital loss and have a lesser tax obligation without sacrificing gains from your position despite the IRS trying to limit your ability to do this through the "wash" rule




as indicated in the earlier post if you elect to gamble and buy it back in 30 days you may miss out on a gain but you also may be able to buy it back for less -




as to your comment:


" If you could predict future stock prices then you would be rich as f*ck."




there are a great many people who have gotten phenomenally wealthy from the stock market

were they just lucky? - I doubt it

I'm not one of those people - those people are better at playing the market than me - no excuses

Quote:

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Originally Posted by Half Smoke

the play has nothing to do with predicting stock prices

I consider it an advantage play because the IRS has through their "wash" rule prevented you from selling a stock and claiming a capital loss and then buying the stock right back one minute later

but as indicated in my post they can't prevent you from essentially getting the same benefit - because in the one instance if you gamble and buy it back after 30 days that is a zero sum gamble - so you still gained by being able to claim the capital loss

in the other example, which is a better strategy, you can buy a substantially similar security immediately after the sale - such as selling an index fund that tracks the S&P and buying one or an ETF that tracks the DOW - at the same time without waiting 30 days

very likely that those 2 securities would mirror each other for 30 days and I don't believe the IRS can call them "substantially identical" - the author of the Schwab link agrees

there are many, many other examples of this

the "advantage" is being able to claim the capital loss and have a lesser tax obligation without sacrificing gains from your position despite the IRS trying to limit your ability to do this through the "wash" rule

as indicated in the earlier post if you elect to gamble and buy it back in 30 days you may miss out on a gain but you also may be able to buy it back for less

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I’ll help you out ... have MBA from top 5 Finance program years ago; got the CFA designation, Series 7 & 63 because it was a job requirement working on Buy Side on Wall Street.

When I learned it, it was “selling against the box” and the fact you can buy the exact security (the second “tranche”) right before you sold the first “tranche” and took the loss so long as you can identify the securities, e.g. the IRS does not require FIFO.

Here’s the deal, it’s not an advantage play because there’s no equity you are gaming. You are taking a risk with the stock, e.g. your effective equity position is unchanged and using synthetics introduces tracking error aka gives you new risks that is not part of the underlying security position.

You made a premise (in the original post) that the stock will recover or go up over time ... YOU DO NOT KNOW THAT. That was the hidden assumption that you made to pull of this advantage play.

You need to think about the economics, nothing you wrote in the first post assures the economics of the stock position will improve with time.

Quote:

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Originally Posted by Ex-AP

Quote:

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Originally Posted by Half Smoke

the play has nothing to do with predicting stock prices

I consider it an advantage play because the IRS has through their "wash" rule prevented you from selling a stock and claiming a capital loss and then buying the stock right back one minute later

but as indicated in my post they can't prevent you from essentially getting the same benefit - because in the one instance if you gamble and buy it back after 30 days that is a zero sum gamble - so you still gained by being able to claim the capital loss

in the other example, which is a better strategy, you can buy a substantially similar security immediately after the sale - such as selling an index fund that tracks the S&P and buying one or an ETF that tracks the DOW - at the same time without waiting 30 days

very likely that those 2 securities would mirror each other for 30 days and I don't believe the IRS can call them "substantially identical" - the author of the Schwab link agrees

there are many, many other examples of this

the "advantage" is being able to claim the capital loss and have a lesser tax obligation without sacrificing gains from your position despite the IRS trying to limit your ability to do this through the "wash" rule

as indicated in the earlier post if you elect to gamble and buy it back in 30 days you may miss out on a gain but you also may be able to buy it back for less

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I’ll help you out ... have MBA from top 5 Finance program years ago; got the CFA designation, Series 7 & 63 because it was a job requirement working on Buy Side on Wall Street.

When I learned it, it was “selling against the box” and the fact you can buy the exact security (the second “tranche”) right before you sold the first “tranche” and took the loss so long as you can identify the securities, e.g. the IRS does not require FIFO.

Here’s the deal, it’s not an advantage play because there’s no equity you are gaming. You are taking a risk with the stock, e.g. your effective equity position is unchanged and using synthetics introduces tracking error aka gives you new risks that is not part of the underlying security position.

You made a premise (in the original post) that the stock will recover or go up over time ... YOU DO NOT KNOW THAT. That was the hidden assumption that you made to pull of this advantage play.

You need to think about the economics, nothing you wrote in the first post assures the economics of the stock position will improve with time.

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you wrote: "nothing you wrote in the first post assures the economics of the stock position will improve with time"


true - but it can assure that you can claim a capital loss for that year. if you don't do it and it goes up beyond the point in which you bought it you cannot claim a capital loss for any year
.................................just about everybody who buys a stock does so because they believe it will go up - they may be wrong but they also may be right


also you wrote this: "you can buy the exact security (the second “tranche”) right before you sold the first"


I don't want to debate this, I may be wrong but please note this which is a direct quote from the IRS website:


"A wash sale occurs when you sell or trade securities at a loss and within 30 days BEFORE OR AFTER the sale"



this would seem to indicate that you are incorrect



also, once more you wrote this:



"If you could predict future stock prices then you would be rich as f*ck."




and as I said before, a great many people have gotten "rich as f*ck" from their stock market moves

bitcoin strangles/straddles (https://www.deribit.com/main#/options?tab=all) ? J/K, the premium would eat you alive.

Quote:

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Originally Posted by Half Smoke

you wrote: "nothing you wrote in the first post assures the economics of the stock position will improve with time"

true - but it can assure that you can claim a capital loss for that year. if you don't do it and it goes up beyond the point in which you bought it you cannot claim a capital loss for any year
.................................just about everybody who buys a stock does so because they believe it will go up - they may be wrong but they also may be right


also you wrote this: "you can buy the exact security (the second “tranche”) right before you sold the first"


I don't want to debate this, I may be wrong but please note this which is a direct quote from the IRS website:


"A wash sale occurs when you sell or trade securities at a loss and within 30 days BEFORE OR AFTER the sale"

this would seem to indicate that you are incorrect

also, once more you wrote this:

"If you could predict future stock prices then you would be rich as f*ck."

and as I said before, a great many people have gotten "rich as f*ck" from their stock market moves

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Dude:

1. Please do yourself a favor and LEARN WHAT AN ADVANTAGE PLAY really means. You admitted you are clueless based on this thread with respect your idea as outlined in the first post.

2. Here is the IRS guideline: https://www.irs.gov/faqs/capital-gai...lits-traders-1

The key phrase is: “If you can identify which shares of stock you sold, your basis generally is: What you paid for the shares sold plus any costs of purchase.” As I stated before, you don’t have to use FIFO.

Per the IRS, it’s up to the broker who advises you of the wash sale rule: “a Form 1099-B, the broker will provide you the following information: the date of acquisition (box 1b), whether the gain or loss is short-term or long-term (box 2), cost or other basis (box 1e), and the loss disallowed due to a wash sale (box 1g) or the amount of accrued market discount (box 1f).“

3. Don’t confuse brains with a bull market. Lots of people made money in bull markets. Lots of people also made money in real estate or other financial assets. The reverse can be said when the market tanks, respectively.

On Wall Street, it is not uncommon for guys on Sell Side to get millions in annual bonuses. I really doubt you got millions in an annual bonus, if ever.

In summary, what you wrote was not an advantage play. There are a lot of advantage play besides casinos: airline miles, iTune cards, etc but those situations involve finding “equity” and taking advantage of it. It’s hard to find advantage plays in the stock market due to transaction costs and highly efficient markets.

- one last thing, I had a buddy lose $1.4 million on a bad option related trade. He lost $1 million of his capital and Schwab sued him for another $400,000 because Schwab extended him credit and the trade went south. If you just bother to read the FINRA website, you get to read about the cases where the little guy loses almost all their entire net worth due to bad trades, mismanagement, fraud, etc. The little guy generally gets screwed in the stock market as the deck is stacked against him/her ... I can tell you for a fact, the little guy gets information way too late and generally after the “big boys” made their trades. I wouldn’t trust Schwab since they are conflicted. If anyone is finding advantage plays in the stock market, it’s the sell side due to the massive information asymmetry.

Quote: Ex-AP

"If anyone is finding advantage plays in the stock market, it’s the sell side due to the massive information asymmetry"


suggesting bearishness is the way to go

the indexes have gone up every single year after 2008 - many years in double digits

the bears have been growling loudly since 2010 - and they've gotten literally creamed

doesn't mean I'm saying now is a great time to be bullish - but I'm never ever going to bet with the bears

if you do - good luck to you - again, not saying you're wrong - but dozens if not hundreds of bearish predictions from supposedly market wiseguys have been wrong in the last 10 years





one last thing - the suits on the sell side that got millions of dollars in bonuses (most of them) got those bonuses from churning OPM - (other people's money) - not from trading their own


also, you point out correctly that the little guy generally gets screwed in the stock market

true - but there also are ways a little guy can protect himself against getting screwed - or at least reduce the impact of the screwing by a lot

Toshiba's Simulated Bifurcation Algorithm is a game changer. Note that it will only be available (sold to) to financial institutions (who will use it to quickly find ultra-complex currency arbitrage opportunities) - so again the little guy will get creamed:
https://www.electronicsweekly.com/ne...chine-2019-12/

Quote:

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Originally Posted by Half Smoke

Quote: Ex-AP

"If anyone is finding advantage plays in the stock market, it’s the sell side due to the massive information asymmetry"

Blah ... blah ...blah

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Stocks trade on information ... the sell side can see the order flows. Then there is the issue of front running.

It’s clear to me you never worked on Wall Street so you don’t see the inner working.

The stock indices are not static, there is a lot of survivorship bias. During the years since 2008, a ton of public companies went bankrupted .. just look at the retail industry.

Under President Obama’s 2nd term we had more Americans living in poverty on an absolute basis than ever before. Stock indices are only a way to express a basket of stocks, and mean very little elsewhere.

I am so done with this thread.

Good luck.

Quote - EX-AP

"Stock indices are only a way to express a basket of stocks, and mean very little elsewhere."


Disagree - strongly. they don't say everything about the market but they say a lot more than that. Vanguard sells a total stock market index which attempts to buy every single stock out there (maybe not some of the penny stocks) and the performance of this fund closely matches that of their other index funds


........................................the indexes are a strong indicator of the direction of the total market



I"ve had positions in the market now for 41 years - only on the buy side

I've done really well, I'm not saying I'm one of the wizards who has made tens of millions aggressively trading

but because of the market I don't have to lift a finger now - it's been an extremely positive experience

in the down years I just held on and waited - the worst was the dotcom bust - that took IIRC about 2.5 years to come back - but it's always come back - not a guarantee for the future I admit - but I'm going to continue to bet the favorite

A rising tide lifts all boats. OKA quantitative easing.

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the IRS has a nice benefit for older, retired persons who have experienced market gains and now want to do something else with their money

long term capital gains (an asset held for more than one year) are not subject to Federal taxation if the individual selling has income less than $41,675 or a married couple filing jointly has income less than $83,350

even wealthy, younger people pay much less tax on long term gains - the max is 20% - short term capital gains are generally taxed the same as ordinary income - so high income people generally have to pay a high % tax on short term gains

I believe how the States handle this differs from state to state - I only know what my State does






https://www.bankrate.com/investing/l...tal-gains-tax/



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