Tax discussion, strategies and questions

[elasalle]

I have loads of stuff expiring in Jan 2022 ranging from 100c to 500c, so I've given this some thought too. In California, my LTCG tax rate is 42% which is higher than Virginia, but some of the considerations may apply.

1. If exercising, this year, the stock can be sold late 2022 for LTCG, as opposed to 2023 for LTCG. Depending on how tax legislation goes next year and your income, that may make a difference.

2. If you're closing, time value is negligible compared to daily TSLA fluctuations of 1-5%.

3. Closing next year may give you more capital to work with, because taxes won't be due as soon and you can keep working with that money. Plus, if any trades end up as a loss, you'll have a whole year to write off those again the gains.

Other factors include your state income tax, whether you're being taxed quarterly, the impact of unpaid tax interest of 5-6%, and whether your income subjects you to the additional 3.8% investment income tax. There's also the question of whether LTCG will be 25% this year or 20%, which again depends on income.

Finally, it doesn't need to be all close or exercise. You can exercise some, and close the rest.

thanks. I exercised one block. The shares exercised I plan to hold long term

This block, I am thinking I might be better off locking in the long term gains, because not sure if I can trade and hold the shares(if exercised) for 1 year.
So i am leaning towards closing and paying the taxes. However the money will go to buy Jan 2024 calls and will leverage up by 1.6-2X.

As for tax money - will sell CC's and move that monies out of account and use it for most of taxes bill.

still one more week to decide. cheers!!

 

[capster]

If, for example, you happened to make a Roth conversion during this quarter and will need to sell shares to cover the taxes, you can get those shares almost an extra two weeks in the market by filing your return and paying all your taxes by the end of January (vs paying the estimated taxes).

"January payment. If you file your 2021 Form 1040 or 1040-SR by January 31, 2022, and pay the rest of the tax you owe, you don’t need to make the payment due on January 18, 2022."

From chapter 2 of the IRS publication (pdf): https://www.irs.gov/pub/irs-pdf/p505.pdf

 

[elasalle]

Q: Say you sell Puts for loss and then buy Calls
as long as I don't have any other Put trades - do the Puts count for losses in taxes?

This is all just vacation planning (else I could have managed it). Puts had lot of cash held, so selling them even for losses freed up a lot of $$ for some more LEAPS
Doing this freed up so much margin

 

[Knightshade]

Q: Say you sell Puts for loss and then buy Calls
as long as I don't have any other Put trades - do the Puts count for losses in taxes?

Depending on who you ask the answer is either:

Sure they do, a put isn't the same thing as a call, so no wash sale issues.

or

Of course they don't- trading options the same stock is substantially similar and thus a wash sale.


You can find vigorous opinions on both sides of this debtate.

FWIW most brokers end of year reporting go with option 1, but then add a slew of disclaimers that you can't rely on them for any tax advice and need to decide what a wash sale is for yourself.

 

[Cherry Wine]

Depending on who you ask the answer is either:

Sure they do, a put isn't the same thing as a call, so no wash sale issues.

or

Of course they don't- trading options the same stock is substantially similar and thus a wash sale.


You can find vigorous opinions on both sides of this debtate.

FWIW most brokers end of year reporting go with option 1, but then add a slew of disclaimers that you can't rely on them for any tax advice and need to decide what a wash sale is for yourself.

Yep. It's a legal gray area.

 

[tivoboy]

Q: Say you sell Puts for loss and then buy Calls
as long as I don't have any other Put trades - do the Puts count for losses in taxes?

This is all just vacation planning (else I could have managed it). Puts had lot of cash held, so selling them even for losses freed up a lot of $$ for some more LEAPS
Doing this freed up so much margin

This is one of those somewhat hard to define areas, but what I’ve seen in the past is that the IRS would consider the purchase of the Call in TSLA relative to the sale of the Put in TSLA, a ”substantially similar stock or security:” and you’d still trigger the wash sale rules. But its really one of the areas that has some of the poorer explicit definition to be certain of what the IRS final interpretation of it will be. Maybe “the accountant” can add more specific context.

 

[elasalle]

Depending on who you ask the answer is either:

Sure they do, a put isn't the same thing as a call, so no wash sale issues.

or

Of course they don't- trading options the same stock is substantially similar and thus a wash sale.


You can find vigorous opinions on both sides of this debtate.

FWIW most brokers end of year reporting go with option 1, but then add a slew of disclaimers that you can't rely on them for any tax advice and need to decide what a wash sale is for yourself.

thanks - too much hassle it looks like
but since whole market is down - could load up on some other names ... assuming a whole market bounce.
(freed up lot of $$ anyway)

 

[BornToFly]

This is one of those somewhat hard to define areas, but what I’ve seen in the past is that the IRS would consider the purchase of the Call in TSLA relative to the sale of the Put in TSLA, a ”substantially similar stock or security:” and you’d still trigger the wash sale rules. But its really one of the areas that has some of the poorer explicit definition to be certain of what the IRS final interpretation of it will be. Maybe “the accountant” can add more specific context.

I don't agree with this, and this is not how Fidelity shows my gains/losses for the year. In my mind, a litmus test for a substantially similar security is a similar price. If a Put expiring this week is nearly worthless, and a same strike Put expiring a month from now is worth a lot, they are clearly not similar (if they were, they would be priced the same). Furthermore, if they are both closed in the same tax year, it is completely irrelevant, because the tax in the end doesn't change, and selling options are always short term capital gains regardless of how long you held them.

 

[Cherry Wine]

I don't agree with this, and this is not how Fidelity shows my gains/losses for the year. In my mind, a litmus test for a substantially similar security is a similar price. If a Put expiring this week is nearly worthless, and a same strike Put expiring a month from now is worth a lot, they are clearly not similar (if they were, they would be priced the same). Furthermore, if they are both closed in the same tax year, it is completely irrelevant, because the tax in the end doesn't change, and selling options are always short term capital gains regardless of how long you held them.

The law's definition of "substantially identical" is sufficiently ambiguous that one could make a straight-faced argument on both sides; and I'm sure many attorneys have. @elasalle - if you're really concerned about wash sales, you may want to look into professional trader tax status. There is a thread on this forum about it.

 

[tivoboy]

I don't agree with this, and this is not how Fidelity shows my gains/losses for the year. In my mind, a litmus test for a substantially similar security is a similar price. If a Put expiring this week is nearly worthless, and a same strike Put expiring a month from now is worth a lot, they are clearly not similar (if they were, they would be priced the same). Furthermore, if they are both closed in the same tax year, it is completely irrelevant, because the tax in the end doesn't change, and selling options are always short term capital gains regardless of how long you held them.

Feel free to have that conversation with the IRS.. I’ll just add that wash sale rules (the overall 61 day window) is not constrained to a calendar or tax year..so selling something for a loss right at the end of the year, 12/31 say and buying it back and or taking a gain sometime early in the following year, will still trigger the wash sale rule. I’m not sure how a brokerage is going to track that wash sale transaction for a 1099-B for the prior year, but maybe that is why we doin’t get them till ~ February in any given year, or why a 1099-C is often issued later.

As others pointed out, SOME brokerages will report this in the favorable way you have indicated, others may not. In the end, its up to the taxpayer with the transaction data from the brokerage or custodian to file it correctly.

 

[stealthyc]

I don't agree with this, and this is not how Fidelity shows my gains/losses for the year. In my mind, a litmus test for a substantially similar security is a similar price. If a Put expiring this week is nearly worthless, and a same strike Put expiring a month from now is worth a lot, they are clearly not similar (if they were, they would be priced the same). Furthermore, if they are both closed in the same tax year, it is completely irrelevant, because the tax in the end doesn't change, and selling options are always short term capital gains regardless of how long you held them.

Selling options can absolutely be long term. I have a short put expiring in Jan which will be long term capital gains if I let it go to expiry (I opened it this past Jan). In fact, it's interesting because you can get cash a year or more in advance of paying tax on it.

Update: I was wrong!

 

[WattsHappening]

This looks like a decent trade. If utilizing margin the downside is, coincidentally, the downside risk. As long as your margin utilization is low enough you should be fine, however the risk is that in the event of a large downturn your portfolio will edge closer and closer to the point of setting off a margin call.

Here's the numbers for the Jan 2024 put at $250 strike:
View attachment 745261

In terms of risk you are risking a max loss of $23,500 for a max profit of $1,500. I certainly agree that $250 is not a price we will see, but in terms of downside risk this trade will expose your portfolio to the downside of $23,500 plus the $1,200 for the cost of the vertical call spread. If you leverage too much and we see a significant decrease in price you may have to mitigate margin calls by selling shares and/or calls, or buying puts.

Personally I have been selling bull put spreads every two weeks to spread out my sales. I decided on Jan 2024 puts at 1400/1300, but encourage you to play around with different strikes to see what you're comfortable with. So here's how that looks:

Expiration Jan 2024
Bull put spreads
Sell to open $1,400 strike put
Buy to open $1,300 strike put
Limit price at $74

View attachment 745262

With this trade you are receiving $7,400 as your max profit upfront in exchange for a max loss of $2,600. A share price of $1,400 by the end of 2023 is not a leap of faith in my opinion. In terms of downside risk I am exposing $2,600 for each of these put spreads.

Compare this to the $250 put and I am getting 9X the amount of cash upfront for the same amount of downside risk.

Lastly I'll add that I am only adding to my vertical call spread position for the $2300/$2475 Jan 2024 calls when the price is below around $19. Any higher and the max profit dips below 8X and I've arbitrarily set an 8x return as the minimum for myself. I have been spreading out purchases every few days, but will probably wait until the start of the year to evaluate my portfolio and determine if I want to add to this position again.

Thanks for this!

If I want to do something similar in a non-margin IRA account, what would this require in terms of cash requirements? Is it just the $2,600 (difference between premium and potential loss)?

 

[Blue horseshoe]

Selling options can absolutely be long term. I have a short put expiring in Jan which will be long term capital gains if I let it go to expiry (I opened it this past Jan). In fact, it's interesting because you can get cash a year or more in advance of paying tax on it.

I believe this is incorrect for US residents. According to this table on IRS form 550:

Option premium on the sold put is a short term gain. From reading the form 550 any premiums from option selling are considered short term if the options aren't exercised

 

[Blue horseshoe]

Thanks for this!

If I want to do something similar in a non-margin IRA account, what would this require in terms of cash requirements? Is it just the $2,600 (difference between premium and potential loss)?

If you're able to do this trade in your ira then yes that should be the cash requirement as that is the max potential loss. Compared to selling one $250 strike put and that would require cash backing of $25,000.

 

[stealthyc]

I believe this is incorrect for US residents. According to this table on IRS form 550:
View attachment 745281

Option premium on the sold put is a short term gain. From reading the form 550 any premiums from option selling are considered short term if the options aren't exercised

I stand corrected thanks!

 

[Knightshade]

If you're able to do this trade in your ira then yes that should be the cash requirement as that is the max potential loss. Compared to selling one $250 strike put and that would require cash backing of $25,000.

Note that the amount you'd be 'paying' at max loss is actually $10,000 in the example given ($100 spread in the strikes times 100 shares)- so that's the amount of cash that would get "locked up" to cover this sold put.

This is only a max "net" loss of $2600 because of the $7400 in premium, but the total 10k would be unavailable for anything else for the full 2+ years. (I expect you know this, but the person originally asking might not be clear on it and original question appears to be about using the put premiums to buy other things which you can't do if they're locked up backing the put and in a non-margin account to boot)

 

[Blue horseshoe]

I stand corrected thanks!

I'll add to this, from how the irs form 550 is written you are taxed long term capital gains on a call you've purchased more than one year ago. However there's a wrinkle if you've purchased a call spread over a year ago. If you close out the spread by selling your long call and buying back your short call you're fine and still taxed long term cap gains.

If the short call is assigned and your broker immediately exercises your long call to then give them to the holder of your short call, those shares are not considered long term and you will actually be taxed at short term capital gains in this scenario.

This is a bit OT, but I believe there are many on this forum who may be holding call spreads and can benefit from this information. Hopefully it helps.

 

[WattsHappening]

Note that the amount you'd be 'paying' at max loss is actually $10,000 in the example given ($100 spread in the strikes times 100 shares)- so that's the amount of cash that would get "locked up" to cover this sold put.

This is only a max "net" loss of $2600 because of the $7400 in premium, but the total 10k would be unavailable for anything else for the full 2+ years. (I expect you know this, but the person originally asking might not be clear on it and original question appears to be about using the put premiums to buy other things which you can't do if they're locked up backing the put and in a non-margin account to boot)

Yep, thanks for this. I was the one asking the question about cash requirements. I understand the full $10K will be locked up until the position is unwound.

 

[tivoboy]

Selling options can absolutely be long term. I have a short put expiring in Jan which will be long term capital gains if I let it go to expiry (I opened it this past Jan). In fact, it's interesting because you can get cash a year or more in advance of paying tax on it.

Update: I was wrong!

I didn’t really understand the logistics of the example you gave, but buying and selling LEAP options (and I’m sure there are many other examples of this) can certainly be LT gains assuming the period between purchase and sale (or exercise) is at least a year AND A DAY.

 

[MikeC]

If I have long-term gains and short-term losses this year, do they stay separate for accounting purposes? Meaning I pay 15-20% on the LTCG and I can deduct $3500 of ST losses from my income?

I am toying with the idea of selling shares for short term gain to cancel out my short term losses above $3500, so I don’t have to deal with carrying the rest of the loss to future years.