Question of the Month (December 2019): Tax Efficient Investing

Posted by Mike Long, CFP®, ChFC®, CLU®

Dec 1, 2019

Your client sells common stock in The Coca-Cola Company (KO) at a loss to offset gains in other parts of his portfolio. A wash sale may be triggered if he purchases which of the following?

  1. PepsiCo, Inc. common stock (PEP)
  2. The Coca-Cola Company bonds maturing in 2025
  3. Put options on The Coca-Cola Company common stock
  4. The Coca-Cola Company convertible bonds maturing in 2025

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Correct answer: D. The Coca-Cola Company convertible bonds maturing in 2025

Instructor insight:

Because convertible bonds have the option to be exchanged for Coca-Cola Co common stock they would trigger a wash sale if your client purchases them. Normal Coca-Cola Co bonds do not have the option to be exchanged for common stock and are safe to purchase without triggering a wash sale as a result.

The put options on Coca-Cola Co common stock are also safe to purchase without triggering a wash sale because the client would be buying the right to sell additional shares of Coca-Cola Co rather than buy back the shares. On the other hand, purchasing call options would trigger a wash sale as your client would then have the option to buy back the Coca-Cola Co shares.

While PepsiCo is a direct competitor with a very similar business model it's still a separate entity, so purchasing PepsiCo common stock would not trigger a wash sale. In fact, you could recommend PepsiCo common stock as an alternative to your client in order to avoid a wash sale while still achieving the same investment objective.

 

Topics: Practice Questions

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