7539 / When are stock and securities “substantially identical” for purposes of the wash sale rules?

Ordinarily, shares or securities of one corporation are not substantially identical to shares or securities of another corporation. However, a different result may occur as, for example, in reorganization, where facts and circumstances indicate that the stock and securities of predecessor and successor corporations are substantially identical.³ Where voting trust certificates eventually could be exchanged for common stock held by the trust, the certificates were held to be substantially identical to the common stock of the same corporation.⁴

When preferred stock is convertible into common stock of the same corporation, the relative values, price changes, and other circumstances may make the preferred and common stock substantially identical.⁵ Also, when a sale of a stock warrant is followed within 30 days by a purchase of stock of the same corporation, the warrant and the newly acquired stock are substantially identical only if the relative values and price changes are similar.⁶

For purposes of the wash sale rules, options to buy stock or securities apparently can be considered substantially identical not only to the underlying stock, but also to other options or contracts to buy stock or securities.⁷

Under the wash sale rules, a contract or option to acquire or sell stock or securities will include options and contracts that are (or may be) settled in cash or property other than the stock or securities to which the contract relates.⁸ Thus, for example, the acquisition within the period set forth in IRC Section 1091 of a securities futures contract (see Q 7586) to acquire stock of a corporation could cause the taxpayer’s loss on the sale of stock in that corporation to be disallowed under the wash sale rules, notwithstanding that the contract may be settled in
cash.⁹

Generally, bonds are substantially identical if they are not substantially different in any material feature and are not substantially different in several material features considered together (each of which, if considered alone, would not be regarded as substantial).¹⁰ Although very few concrete criteria exist to aid in determining which features are material and when such material features alone or in conjunction will result in a substantial difference, the following may be of
guidance:

1. The interest rate of a bond is considered a material feature.¹¹


2. In determining whether bonds purchased are substantially identical to bonds sold, the bonds purchased must be compared as they existed when purchased with the bonds sold as they existed when sold.¹²


3. Issue dates of bonds are not material features unless some material features are dependent on such dates.¹³


4. Whether a difference in maturity dates is substantial or not is directly affected by the total time period to maturity (i.e., six months added to the duration of one year is vital; added to a duration of 20 years is negligible).¹⁴