Wash sale rule question for inverse ETFs and put options? TSLS tax implications?

The wash sale rule can definitely get tricky with more complex securities. From my understanding, for a wash sale to be triggered, you need to purchase "substantially identical" securities within the 30-day window before or after selling at a loss. In your case, there's a reasonable argument that put options on Tesla and an inverse Tesla ETF (TSLS) are not "substantially identical" securities. They have different risk profiles, different expirations (in the case of options), and different mechanisms for generating returns. The inverse ETF uses swaps and derivatives to create the inverse performance, while put options give you the right to sell at a specific price. That said, the IRS hasn't provided crystal clear guidance specifically addressing ETFs and options in combination. Some tax professionals take a conservative approach and suggest that if both investments are designed to profit from the same underlying security moving in the same direction, there could be a risk.

After struggling with a similar wash sale question last year, I found this awesome tool called taxr.ai (https://taxr.ai) that actually analyzes these complex tax situations with AI. It saved me so much headache trying to interpret vague IRS rules! For my situation, I was dealing with regular ETFs and options, and wasn't sure if my tax loss harvesting would be invalidated. The tool analyzed my specific situation, showed me relevant tax code sections, and gave me a clear explanation I could actually understand without a tax law degree.

Just wanted to follow up here - I tried that taxr.ai site after asking about it and wow, it actually gave me a really clear answer about my inverse ETF question. It analyzed the specific characteristics of TSLS and the put options I was considering, then walked through exactly how the wash sale rules would apply. It even provided the relevant sections of the tax code and some precedent cases where the IRS had ruled on similar situations. Much more detailed than what my accountant told me! Turns out I'm probably in the clear with my specific strategy, but it also showed me some potential pitfalls to avoid. Really helpful for these edge cases where the tax treatment isn't obvious.

FYI for anyone trying to get clarity directly from the IRS on complex wash sale situations like this - good luck getting through on the phone! After trying for DAYS to speak with someone about a similar tax issue, I finally used Claimyr (https://claimyr.com) and got through to an actual IRS agent in under an hour. They have this cool system that navigates the IRS phone tree for you and calls you back when an agent is on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was about to give up on getting an official ruling on my own wash sale situation until I found this. The IRS agent I spoke with actually provided some useful guidance that saved me from making a costly mistake on my taxes.

I need to eat my words. After being super skeptical about that Claimyr service, I decided to try it yesterday out of pure frustration after my 8th failed attempt to reach someone at the IRS about my own wash sale question with some SPY options and inverse ETFs. It actually worked! Got a call back in about 40 minutes, and was connected to an IRS tax specialist who was able to give me guidance on my specific situation. She explained that while the IRS doesn't have explicit rules on inverse ETFs vs options, they generally look at whether the economic risk is substantially similar. Saved me hours of frustration and actually got a useful answer. Still can't believe it worked after weeks of trying on my own.

Another angle to consider with the inverse ETF and put options is how the timing might affect things. The wash sale rule applies to a window of time (30 days before and after). So if you're concerned, you could potentially wait 31 days after selling the inverse ETF before purchasing put options to be completely safe. The downside obviously is you're without the downside protection for a month, but if you want to be 100% certain to avoid any wash sale complications, that's the safest route.

Has anyone actually been audited by the IRS specifically for wash sales involving ETFs and options? I've been doing similar trades for years and never had an issue, but I'm not sure if that's because the IRS approved of my strategy or just never noticed...

I've been dealing with similar inverse ETF wash sale questions and wanted to share what I learned from my tax attorney. The key factor the IRS looks at is whether the securities provide "substantially identical" economic exposure, not just whether they're technically different instruments. For your TSLS/Tesla puts situation, a few things work in your favor: inverse ETFs use derivatives and daily rebalancing which creates tracking differences from simple short exposure, put options have specific strike prices and expiration dates that create different risk profiles, and the leverage factor in TSLS (if any) versus unleveraged put options creates additional differentiation. However, be careful about the timing and magnitude. If you're buying at-the-money puts immediately after selling TSLS, you're in riskier territory than if you buy far OTM puts or wait even just a week or two. The IRS has been getting more sophisticated about these strategies, especially with the increase in ETF complexity. My attorney's advice was to document your investment thesis clearly - if you can show the puts serve a different purpose (like hedging a larger portfolio position rather than just replacing the inverse ETF exposure), that strengthens your position if questioned.