How to defer tax by reducing short term capital gain using call spread.

[Davidzhao365]

Moderator comment added at the request of @Davidzhao365. Summary: this doesn't work, there is a special IRS rule against it. The blue text is what he asked to add. --ggr.

Options traders use option spreads containing offsetting positions to limit risk and provide a reasonable opportunity to make a net profit on the trade. That’s very different from an unscrupulous trader entering a complex trade with offsetting positions set up for no overall risk (the rule is substantially reduced risk) or reward. Why would an options trader do that? For tax avoidance reasons only.

The IRS straddle loss deferral rules are set up to catch this trader and prevent this type of tax avoidance. The straddle loss deferral rule defers a loss to the subsequent tax year when the winning side of the position is closed, thereby reversing what the unscrupulous trader was trying to achieve.

------- end of moderator edit.

 

[kengchang]

You might want read up on this

Tax Treatment For Trading Options | GreenTraderTax.

 

[Davidzhao365]

Thanks so much @kengchang This information is super valuable for me!
I will read carefully!

 

[Davidzhao365]

@kengchang do you mind opening a DM with me on Twitter?
@Davidzhao365

 

[ggr]

Or discuss it here, I think there is plenty of interest.

 

[Jovian]

Yeah definitely interested in learning more myself!

P.S. Anyone have a Bay Area (or elsewhere and willing to work remotely) tax specialist who could handle tax planning things like this when it pertains to capital gains? I've already had one accountant make a major advising error and I've been looking and emailing around to no avail. Could you private message me details if anyone has one?

 

[kengchang]

Basically it's not going to work, especially when my straddle was established on the same day and with the same expiration

 

[Davidzhao365]

@MDevinsky I am contacting the CPA firm who wrote the article that we are discussing here.
Apparently I need some professional advice

I am glad that I haven't made a huge mistake due to lack of tax knowledge and people here corrected my mistake early.
GreenTraderTax

 

[Davidzhao365]

@ggr can you help me edit the original thread?
I can't edit it seems like. I would like to make it clear that it doesn't work due to

"
Options traders use option spreads containing offsetting positions to limit risk and provide a reasonable opportunity to make a net profit on the trade. That’s very different from an unscrupulous trader entering a complex trade with offsetting positions set up for no overall risk (the rule is substantially reduced risk) or reward. Why would an options trader do that? For tax avoidance reasons only.

The IRS straddle loss deferral rules are set up to catch this trader and prevent this type of tax avoidance. The straddle loss deferral rule defers a loss to the subsequent tax year when the winning side of the position is closed, thereby reversing what the unscrupulous trader was trying to achieve.
"

Tax Treatment For Trading Options | GreenTraderTax

Fairy Modfather: done! --ggr

 

[Davidzhao365]

Thanks @ggr !

 

[Davidzhao365]

I was told by my broker to file 13H form with SEC and acquire a LTID so that my broker can add the LTID to all my future trades.

Anyone has 13H filed before? Any implication on the tax? Thanks! (They asked for Tax ID in the form)

I accidentally triggered 13H when opening call spreads, while implementing a method to defer tax (which is a wrong way described here
How to defer tax by reducing short term capital gain using call spread.

 

[kengchang]

I was told by my broker to file 13H form with SEC and acquire a LTID so that my broker can add the LTID to all my future trades.

Anyone has 13H filed before? Any implication on the tax? Thanks! (They asked for Tax ID in the form)

I accidentally triggered 13H when opening call spreads, while implementing a method to defer tax (which is a wrong way described here
How to defer tax by reducing short term capital gain using call spread.

Do the application online and get it notarized then upload the pdf. After getting your login, you need to file online 13H to get your LTID. No implication on tax

Start from www.sec.gov -> Filings - EDGAR Information for Filer -> Read Prepare and submit my Form ID Application.

Remember to enter from www.sec.gov, no direct link otherwise you will error out when you submit your application

 

[Davidzhao365]

Thanks @kengchang a lot! I have received the LTID!

Do you mind chatting with me on Twitter or chat on TMC here? Just to connect with you and exchange ideas.

Twitter davidzhao365

 

[kengchang]

I think here is fine for everyone's benefit otherwise you can PM me on TMC

 

[Davidzhao365]

@kengchang I tried to PM you on TMC but seems your profile page is restricted, I can't see it.
Do you mind opening a PM with me instead?

 

[Boomer19]

what does filing for an LTID have to do with figuring out the tax implications of your options positions?

 

[juanmedina]

This thread is kind of confusing. For my sanity check.... I have a Jun 21 $1250 and if were to lock my profits and defer the tax to next year I can add a leg and sell the $1260 call therefore converting my trade into a debit spread with a max loss of around $620 if things go south. Next year I will close the spread or let it expire and pay taxes. Is this accurate?

 

[kengchang]

This thread is kind of confusing. For my sanity check.... I have a Jun 21 $1250 and if were to lock my profits and defer the tax to next year I can add a leg and sell the $1260 call therefore converting my trade into a debit spread with a max loss of around $620 if things go south. Next year I will close the spread or let it expire and pay taxes. Is this accurate?

Selling Call/Put is short term tax event. You can't long term selling call/put.

 

[juanmedina]

Selling Call/Put is short term tax event. You can't long term selling call/put.

Yeah I get that it will be a short term capital gain but I am wondering if I can defer the tax bill to next year that way without risking my gains.

 

[kengchang]

Wash sale and straddle loss deferral rules prevents this. It's just not possible.