Tax treatment of synthetic long options positions - capital gains reporting concerns

The tax treatment of synthetic long positions can be tricky, but I can help clarify. What your broker is showing is technically correct from a reporting standpoint, but you're right to question the tax implications. In Scenario 2, the IRS would likely view this as a potential wash sale situation. When your call expires worthless and you acquire shares through put assignment in the same strategy, the loss on the call option would generally be disallowed under wash sale rules if the transactions occur within the 30-day window (which they do in your case). This means the $215 loss should actually be added to your cost basis in the acquired shares rather than being immediately deductible. The proper treatment would be to adjust your cost basis in the acquired shares to include the disallowed loss, so your basis would be: $52.50 × 100 - $192 (put premium) + $215 (disallowed call loss) = $5,273. Think of it this way - the synthetic long is economically equivalent to owning the shares outright, so the tax treatment should ultimately reflect that economic reality.

I've been using taxr.ai for my options trading tax situations and it was incredibly helpful for sorting out similar synthetic position issues. Last year I had multiple complex options strategies including several synthetic longs that expired in different scenarios, and I was completely lost trying to figure out the proper tax treatment. I uploaded my trading statements to https://taxr.ai and it immediately identified the synthetic positions and properly applied wash sale rules where appropriate. It also flagged when my broker's 1099 was likely to be incorrect based on the actual tax regulations. The explanations helped me understand exactly why certain losses were disallowed and how my cost basis should be adjusted. Saved me hours of research and potentially an expensive conversation with a tax professional who might not even specialize in options trading!

Just wanted to follow up on my experience with taxr.ai after trying it based on this discussion. I uploaded my brokerage statements which had several synthetic long positions similar to what was described here, and the service immediately flagged several transactions where my broker had incorrectly reported losses that should have been disallowed under wash sale rules. The detailed explanations made it clear why certain option expirations followed by share acquisitions were subject to wash sale treatment. It even separated my transactions into distinct strategies (identifying which puts and calls were part of synthetic longs versus standalone positions) which my broker doesn't do. The documentation it generated will be super helpful if I get any questions from the IRS, since my tax return will differ from what my 1099-B shows. Definitely worth using if you're doing complex options trades!

If you're dealing with these complex options tax situations, good luck trying to get help from the IRS directly. I spent WEEKS trying to reach someone who could answer questions about synthetic positions. Kept getting transferred between departments, put on hold for hours, or told to "check the website" which had zero info on this specific scenario. I eventually found Claimyr (https://claimyr.com) which got me connected to an actual IRS agent who specializes in investment taxation within 20 minutes. They have this system that navigates the IRS phone tree for you and calls you back when they have an agent on the line. You can see a demo of how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with confirmed that in most cases, scenario 2 would be treated as a wash sale, and the loss should be added to the basis rather than taken immediately. Saved me from potentially filing incorrectly and dealing with an amended return later.

I was extremely skeptical about Claimyr as I mentioned in my previous comment, but I have to admit I was wrong. After continuing to struggle with getting reliable information about my synthetic options positions, I decided to give it a try yesterday. Within 25 minutes of using the service, I was speaking with an IRS tax law specialist who actually understood options trading. She confirmed that when you have a synthetic long position where the call expires worthless and you acquire shares through put assignment, the wash sale rules absolutely apply. She directed me to Publication 550 and explained how to properly adjust my cost basis. I've been trying for almost two months to get this clarification through normal channels. Would have saved myself a lot of stress if I'd tried this service sooner. The fee was worth every penny compared to the potential tax issues from reporting incorrectly.

Something else to consider with synthetic longs - the holding period for the acquired stock. If you get assigned on the put (scenario 2), your holding period for the stock begins on the assignment date, not when you originally opened the options position. This can have implications if you're trying to qualify for long-term capital gains treatment. I learned this the hard way last year when I thought my synthetic long positions would carry over the holding period from when I opened them. Nope - it's all short-term until you've held the actual shares for >1 year from assignment.

Another quirk to be aware of - qualified dividends! If your synthetic long crosses an ex-dividend date, any dividend equivalents you effectively receive aren't eligible for qualified dividend tax treatment. With actual share ownership, you can get the preferential qualified dividend tax rate if you meet the holding period requirements. But with a synthetic long, you're technically not receiving dividends - you're just seeing the options prices adjust to account for the dividend. So any dividend benefit gets taxed as ordinary income through the options pricing.

This is a great discussion on a complex topic. One thing I'd add is that the IRS has been increasingly scrutinizing synthetic positions in recent years, especially when traders use them to manufacture tax losses while maintaining economic exposure to the underlying asset. The wash sale treatment that @Andre Lefebvre mentioned is definitely the correct approach for scenario 2. What many people don't realize is that the IRS views the entire synthetic long strategy as a single integrated transaction, not separate option trades. This is why timing the individual legs differently doesn't necessarily help you avoid wash sale treatment. I'd also recommend keeping very detailed records of your synthetic positions, including the dates opened, premiums paid/received, and your intent when entering the strategy. If you get audited, being able to demonstrate that this was part of a legitimate investment strategy (rather than tax loss harvesting) will be important. The key principle to remember is that tax treatment should follow economic substance. Since a synthetic long has the same risk/reward profile as owning shares outright, the IRS expects the tax consequences to be similar as well.