Yes, trading covered calls can potentially trigger wash sales. A wash sale occurs when an investor sells a security at a loss and then repurchases the same or a substantially identical security within a 30-day window around the sale date, in an effort to capture a tax loss while maintaining their market position.
When it comes to covered calls, if you sell a call option and the underlying stock is sold at a loss, purchasing back the same stock or entering into a similar position could trigger wash sale rules. The IRS considers this as reacquiring substantially identical securities.
To avoid triggering a wash sale with covered calls, investors need to be cautious about their trading activities within the wash sale timeframe. For example, if you sell shares at a loss, you shouldn’t buy back those shares or sell short a similar position within 30 days before or after the sale. Additionally, it’s important to note that the wash sale rule applies across all accounts owned by the taxpayer, which means sales in one account and purchases in another can still lead to a wash sale.
Thus, keeping track of your trades and being aware of wash sale rules can help in tax planning and ensuring compliance with IRS regulations.
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