Liability on a kind of ROTH / Traditional IRA Straddle

[nick...@dekedigital.com]

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.)

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>

[Arthur Rubin]

On Tuesday, August 2, 2016 at 8:25:04 AM UTC-7, nick...@dekedigital.com wrote:
> 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.

--
Arthur L. Rubin, AFSP, CRTP in Brea, CA