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How to minimize tax from the option gain?

Discussion in 'TSLA Investor Discussions' started by kevin99, May 17, 2013.

  1. kevin99

    kevin99 Banned

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    #1 kevin99, May 17, 2013
    Last edited: May 27, 2013
    Consider myself lucky. I got in @35. And as the stock starts to make a run, I research and research and went all in, even abandon my usual safe trading and went for options.
    Now I have a good problem:cool:, my gain is going to trigger AMT or whatever it is, I need to pay tax, a lot of tax. I do have some basic knowledge of keeping a position long enough for a long term tax treatment.

    However for example, I have Sept call, so I can't hold it longer than one year. I wonder if I can roll it into newer option and not trigger any tax? Is there any way I could make the gain from the Sept call into longer term gain?

    I am surprise I couldn't find any answer here, nor a google search.

    Yes I am getting myself a Model S, while keeping my X reservation:smile:.
     
  2. kenliles

    kenliles Active Member

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    Rolling to another option doesn't work to prolong the hold; unless this was in a RothIRA I don't a way to avoid it's tax without finding a loss against it. Now the AMT part I've never dealt with personally, so not sure if there is some way to avoid that on a more global basis;
    sorry- no help here; maybe others will have something I'm not aware of
     
  3. Six

    Six Member

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    Only way I know of to avoid a tax on options is to exercise the option and turn it into stock. If you sell the option you will need to pay tax as far as I know. See below:

    If you exercise a call option by buying stock from the writer at the designated price, add the option cost to the price paid for the shares. This becomes your tax basis. When you sell, you will have a short-term or long-term capital gain or loss depending on how long you hold the stock. That means that your holding period is reset when you exercise the option.

    For example, say you spend $1,000 on a July 10, 2012, call option to buy 300 shares of XYZ Corp. at $15 per share. On July 2 of 2012, it's selling for a robust $35, so you exercise. Add the $1,000 option cost to the $4,500 spent on the shares (300 times $15). Your basis in the stock is $5,500, and your holding period begins on July 3, the day after you acquire the shares.

    If you sell your option, things are simple. You have a capital gain or loss that is either short term or long term, depending on your holding period.
     
  4. DaveT

    DaveT Searcher of green pastures

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    You can give away some of your options (up to $13k per receiver per year). One idea I was toying with regarding options was to give some away to family and friends on the condition that they exercise the options and then hold the stock for a minimum of x years (where x is up to you). That way you incentivize your family and friends getting in to TSLA stock at a good price and they're required to hold the stock, thus likely they'll see a lot of gain. This could be good for parents (ie., for their retirement), less well-off family/siblings or even friends that you want to really help out.
     
  5. GasDoc

    GasDoc Member

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    Can you write off the Model S and the Model X deposit as "research" into TSLA? Or is that too creative?
     
  6. Causalien

    Causalien Reaper of Trolls

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    You can sell enough to get cash and use that cash to cover the exercise.
    Not sure about usa. Can you gift your stock to spouses?
     
  7. gg_got_a_tesla

    gg_got_a_tesla Model S: VIN P65513, Model 3 Res Holder

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    The IRS, when it gets around to more mundane things such as tax audits, would say that you seem to be inhaling whatever gas your patients should be ;)
     
  8. vgrinshpun

    vgrinshpun Active Member

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    My research of the subject also shows that the only way to avoid paying federal taxes on short time gains is to excessive the option and hold stock bought as part of exercising option for more than a year. This will reduce tax rate to short time capital tax rate which is currently 15%.

    Another issue worth noting is that significant increase in taxes might trigger necessity of paying estimated taxes quarterly, or face penalty (10%) if paid at the end of the year instead. There are few rules that can allow to skip quarterly federal tax payments without triggering the 10% penalty. The complete article on the subject from TurboTax is linked below, but just of it is that adjusting monthly federal tax withholding so that total amount withheld during the year is equal or higher than total last year federal tax liability (Rule # 3 in the TurboTax article), allows to eliminate quarterly payments.

    Estimated Taxes: How to Determine What to Pay and When - TurboTax Videos
     
  9. bolosky

    bolosky Member

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    Short term capital gains are taxed at the ordinary income rate. Long-term capital gains (for assets held more than a year) are taxed at 20%. This had been 15% since the Bush tax cuts went into effect, but it increased to 20% as of 2013.
     
  10. Jonathan Hewitt

    Jonathan Hewitt Active Member

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    For you that may be true, but not everyone. I make less than 6 figures, my long term capital gains rate is 15%.

    "Starting with the year 2013, there will be a new long-term capital gains rate of 20% which applies to taxpayers who fall within the new 39.6% tax bracket. The new capital gains tax rates for 2013 and future years are as follows:

    • 0% applies to long-term gains and dividend income if a person is in the 10% and 15% tax brackets,
    • 15% applies to long-term gains and dividend income if a person is in the 25%, 28%, 33%, or 35% tax brackets, and
    • 20% applies to long-term gains and dividend income if a person is in the 39.6% tax bracket."
     
  11. vgrinshpun

    vgrinshpun Active Member

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    The 20% rate on long term capital gains applies only for those in 39.6% marginal tax rate, i.e. with income at or higher than $400,000 (single), 450,000 (maried joint filers).
     
  12. bhuwan

    bhuwan Active Member

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    How about just paying your taxes?
     
  13. Jonathan Hewitt

    Jonathan Hewitt Active Member

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    Thanks for the heads up. I knew I would be owing significant taxes on my TSLA gains from selling options but never thought about paying it early and just assumed I would have a huge tax bill come April 15th. After some research on the subject I decided to do what you said about altering withholding. Conveniently enough I can alter my withholding online. I just finished changing it and it was super easy.

    Let's hope I keep my gains and don't have capital losses to offset them later this year, haha.
     
  14. kevin99

    kevin99 Banned

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    Thanks for all the answers so far. I trust many fellow TSLA investors would have the same good problem. So any insight would benefit the whole community.
    A follow up question on exercise and hold. Lets says i have sept 10 call @60. I would need $60k to exercise and acquire 1000 shares. But I only have $30k so I exercise 5 calls and only acquire 500 shares, plus selling the other 5 calls for gain. The question is does all the gain from the 10 calls go to the new base cost of the 500 shares I acquire, or only the 5 calls exercised?i.e., will the gain from selling the 5 calls treated as short term gain?
     
  15. vgrinshpun

    vgrinshpun Active Member

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    Just stumbled onto additional information that would be useful for anybody expecting sizable TSLA gains this year. This is brand new IRS rule that imposes additional 3.8% tax on net investment income of individuals that meet requirements detailed in the following IRS publication:

    Net Investment Income Tax FAQs
     
  16. deonb

    deonb Active Member

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    If you have other < 1 year stocks that are currently at a loss (AAPL comes to mind), you can sell-and-rebuy them now and take the loss to offset the TSLA gains. It will effectively just delay your taxes though by lowering your cost basis for AAPL. But, if you then hold them >1 year it can become a long-term gain instead.

    If all else fail you can always make some other high-risk short-term investment that you otherwise won't make (SCTY $50 calls?), knowing that if it fails, it would only effectively cost you 60% as much this year.
     
  17. kevin99

    kevin99 Banned

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    Thanks for all the answers so far. I trust many fellow TSLA investor would have the same good problem. So any insight will benefit the whole community.

    Let's take the exercise and hold approach. Let's say I have 10 Sept calls @60. It needs $60k to exercise to acquire the 1000 shares. However I only have $30k so I can only do the following:

    1. exercise 5 calls to buy 500 shares at @60, with cost of $30k.
    2. selling the rest 5 calls and use the all the proceed to acquire 100 shares @100, for example.

    #1 can be hold for more than 1 year for long term gain. The question is for #2, is there a short term gain tax at selling the 5 calls? even though all the proceed is used to acquire the 100 shares? i.e. can all the gain of 10 calls be count as the cost basis of new shares?
     
  18. ggr

    ggr Roadster R80 537, SigS P85 29

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    No, you can't. If you sell at a loss, and then buy something "substantially equivalent" (and re-buying the shares certainly qualifies!) within 30 days, this becomes a "wash sale" by IRS rules, and you can't claim the loss. Instead the loss rolls into the cost basis of the new security.
     
  19. deonb

    deonb Active Member

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    How about moving from a long to a synthetic long? Still a wash sale?

    Either way, you can sell AAPL and buy something else instead.
     
  20. kevin99

    kevin99 Banned

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    Thanks for the answers so far. I trust many fellow TSLA investor would have the same good problem to have. So any insight would benefit the community.

    Let's take the exercise and hold approach. Let's say I have 10 Sept calls @60. However I only have $30k to exercise and hold. So I will do the following:

    A. Exercise 5 calls and acquire 500 shares @60. Cost is $30k.
    B. Sell the other 5 calls and use all the proceed to acquire 100 shares of TSLA @90.

    I am clear on A, if I hold the 500 shares long enough it will be long term gain. The question is on B, is there a short term gain when selling the 5 calls, even though all proceeds is used to acquire 100 share with the purpose of holding it for more than 1 year?
     

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