Kirk Du Plessis 0 Comments. In most cases, figuring out your taxes on ordinary stock investments involves a fairly simply process — you either pay taxes on the gains or deduct the losses. How much you pay or deduct depends on whether the stock qualifies as a short- or long-term investment.
Calculating the taxes from trading options is a horse of a different color. Because trading options involves a more complex transaction, the IRS applies special rules that you need to know about in order to avoid misfiling.
When a stock option expires, it closes the trade. The writer and holder then determine their gain or loss by subtracting the option purchase price from the sales price. The rule governing the short- or long-term capital gain designation is essentially the same as selling or buying back an option.
If the writer buys back the option before it expires, the IRS automatically considers it short-term. When the writer or holder exercises an option, the IRS applies different tax rules.
These rules vary according to whether a put or call gets exercised. When a put gets exercised, the holder reduces the amount realized from the sale of the underlying stock by the cost of the put. The writer reduces the basis in the stock by the amount received for the put. When a call gets exercised, the holder adds the cost of the call to the basis in the stock purchased, while the writer increases the amount realized on the stock sale by the amount received for the call.
Unlike option sales and expirations, the option position does not get reported on Schedule D Form Instead, the proceeds are included in the stock position from the assignment.
When calculating their taxes, investors should take extra care to properly adjust the costs basis of the stock. The IRS treats the sale of exchange-traded index options or other non-equity securities bonds, commodities, or currencies , differently than other types of options transactions.
This offers several advantages to traders of exchange- and broad-based index options. The primary benefit comes from paying lower capital gains taxes. The maximum tax rate for long-term capital gains tops out at Additionally, excess losses may be carried forward indefinitely, and you can carry a loss up to three years back to offset any Sec. Holding them longer will incur higher capital gains taxes. Kirk founded Option Alpha in early and currently serves as the Head Trader.
Kirk currently lives in Pennsylvania USA with his beautiful wife and two daughters. Option Expirations When a stock option expires, it closes the trade.
Sounds easy so far. But when an option gets exercised, the tax rules become more complex. Free Video Training Courses. Daily Options Trading Alerts.More...