Tax discussion, strategies and questions

[EV forever]

OK, accountants and retirement account gurus, I got a nice little puzzle for you. I have a 401k account from a prior employer, a 401k account with my current employer, a traditional IRA (with both pretax and after-tax money in it), a Roth IRA, and a rollover IRA. In my 401k from my prior employer, I have money both in a self-directed brokerage account (invested in TSLA) and in my Vanguard account (invested in a mutual fund). The retirement plan policy required employees to put at least 25% of our money into the Vanguard account. Further, a portion of the money in both the self-directed brokerage account and the Vanguard account is pre-tax; the other portion in each of those accounts is after-tax (Roth).

There are two things I want to do. One, I want to rollover the money in the Vanguard account into my rollover IRA so I can invest it in whatever I want to. Two, I want to perform a backdoor Roth IRA conversion, which means I should try to minimize the amount of money held in all IRAs, in order to minimize the pro-rata taxes I'd have to pay.

If you're still with me, great! Now, what should I do? Should I roll all the money in my 401k with my prior employer into the 401k account with my current employer? How is the pre-tax or after-tax nature of the money in my 401k account tracked? When performing a rollover of any sort, do I need to keep pretax money together and after-tax money together?

Signed,
Dazed and confused

I am neither an accountant nor a retirement guru - but I can shed some light on this because I am in very similar situation and have decided not to do the ROTH conversion due to my pre-tax rollover IRA becoming a major portion of my retirement thanks to TSLA.

If you want to do any back-door conversion of your existing IRA to Roth IRA, do not roll over any of your previous employer 401k into an IRA before you have finished that conversion. This was the mistake I made which is now making it tax prohibitive for me to do a Roth conversion. Let me explain my situation which is very similar to yours

• Both me and my husband have been contributing to after-tax IRA for years as we do not qualify for a pre-tax IRA. Over 15 years we had each about 60K in the post tax IRAs. Our investments were conservative, so almost 50K was just after-tax contribution and only about 10K was gains.
• Then I changed jobs and immediately rolled over my 401k into a rollover IRA - this was around 300K. This was entirely pre-tax money.
• Around this time, we realized the benefits of doing the back door conversion to Roth IRA and wanted to do so. To do so, you have to pay tax on the 'pre-tax' portion of your IRA as well as any tax-deferred gains. You pay this at your current tax bracket.
• In case of my husband's IRA, 50K was post-tax and he only required to pay tax on the 10K gains. His conversion to Roth IRA was straigthforward.
• In my case, now I had 2 IRAs: The 60K IRA similar to my husbands and the 300K in rollover IRA. For conversion the IRAs are considered together as a single entity - so total of 360K of which 50K is pre-tax. So, for my entire IRA 14% was considered post-tax with the remaining being pre-tax. So for me to convert, I would have to pay taxes on 86% of whatever amount I decide to convert. In other words, to convert the 60K, I would be required to pay taxes on ~52K again.
• If I had done the Roth conversion before rolling over the 401k to an IRA, I would be paying taxes only on 10K.
• Further, if I didn't have the rollover IRA, I could contribute 6000 to post-tax IRA every year and do an immediate back-door conversion to ROTH, but the same formula applies to that conversion as well.
• We are in a high tax bracket, plus CA income taxes are quite high - this would be almost 50% of additional money in taxes for any Roth conversion. So it is too expensive to do so now.
• Now, it is probably out of question to try and do this - I invested 90% of my rollover IRA in TSLA. The value of that account has gone up so much that the ratio of 'post-tax' has gotten even smaller.

So my suggestion - finish any Roth conversion first, only then think of rolling over 401k into IRA. You may want to do these in stages over a period of time which could be a couple of years.
One caveat - all my information is about 4-5 years old, so you should check with . But I don't believe the Roth conversion rules have changed much.

 

[mrmage]

Please don't comment on the politics of this (ie whether the taxes are good, bad, liberal, conservative, etc). That said...

Like many other TSLA holders, I have unearned profits that will qualify as long term capital gains this year.

Taxes next year may be very different though. I proposals just killed in September that would have increased taxes 1-3%, wealth tax, etc, in California. At the national level long term capital gains may be eliminated or phased out.These are unusual times.

Some strategies I've been considering for long term positions:

1. Sell after Nov elections, but before 2021, if taxes are likely to increase substantially. Reinvest to continue long, but reserve enough cash to ensure taxes can be paid regardless of the performance in 2021.

2. Trade stocks that are long term capital gains for the rest of this year to maximize profits. At the end of the year, reserve enough cash to pay for taxes.

3. Proceed as normal, without regards to changes.

In a normal year, #3 would be my approach. However, tax changes next year could double the tax rate. I'm inclined to try a bit of everything, but was wondering what others have been thinking.

 

[Green Pete]

Please don't comment on the politics of this (ie whether the taxes are good, bad, liberal, conservative, etc). That said...

Like many other TSLA holders, I have unearned profits that will qualify as long term capital gains this year.

Taxes next year may be very different though. I proposals just killed in September that would have increased taxes 1-3%, wealth tax, etc, in California. At the national level long term capital gains may be eliminated or phased out.These are unusual times.

Some strategies I've been considering for long term positions:

1. Sell after Nov elections, but before 2021, if taxes are likely to increase substantially. Reinvest to continue long, but reserve enough cash to ensure taxes can be paid regardless of the performance in 2021.

2. Trade stocks that are long term capital gains for the rest of this year to maximize profits. At the end of the year, reserve enough cash to pay for taxes.

3. Proceed as normal, without regards to changes.

In a normal year, #3 would be my approach. However, tax changes next year could double the tax rate. I'm inclined to try a bit of everything, but was wondering what others have been thinking.

looks like its for people with over 30 million, and could tax you for up to 10 years after you leave. It doesn't apply to me, but it sure feels like in a work remotely era it will push a lot of people to leave.

EDITORIAL: California wealth tax proposal would apply to non-residents

 

[Curt Renz]

Please don't comment on the politics of this (ie whether the taxes are good, bad, liberal, conservative, etc). That said...

Like many other TSLA holders, I have a substantial position with unearned gains that will qualify as long term capital gains this year.

Taxes next year may be very different from this year though. I saw some proposals that were just killed in September that would have increased taxes 1-3%, wealth tax, in California. At the national level, long term capital gains may be eliminated next year. Or maybe that will be phased in.

Some of the following strategies I've been considering for positions that are long term capital gains:

1. Sell after Nov elections, but before 2021, if taxes are likely to increase substantially. Reinvest to continue long, but reserve enough cash to ensure taxes can be paid regardless of the performance in 2021.

2. Trade stocks that are long term capital gains for the rest of this year to maximize profits. At the end of the year, reserve enough cash to pay for taxes.

3. Proceed as normal, without regards to the above.

In a normal year, #3 would be my approach. However, tax changes next year could double the tax rate. I'm inclined to try some of each, but was wondering what others have been thinking. Any thoughts?

A possibly new president and Congress would not be in place until January 2021. If they were to create new tax laws, those would not likely apply to realized capital gains until 2022. It's even less likely that they would apply retroactively to before the passing of a new tax law. And deliberations regarding new tax laws could be dragged out for some time. In any event, let's stay abreast of related news.

 

[mrmage]

A possibly new president and Congress would not be in place until January 2021. If they were to create new tax laws, those would not likely apply to realized capital gains until 2022. It's even less likely that they would apply retroactively to before the passing of a new tax law. And deliberations regarding new tax laws could be dragged out for some time. In any event, let's stay abreast of related news.

I had always assumed that, until I saw tax proposals last night in California. If they hadn't been blocked by the governor, they would have been retroactive.

 

[mrmage]

looks like its for people with over 30 million, and could tax you for up to 10 years after you leave. It doesn't apply to me, but it sure feels like in a work remotely era it will push a lot of people to leave.

EDITORIAL: California wealth tax proposal would apply to non-residents

looks like its for people with over 30 million, and could tax you for up to 10 years after you leave. It doesn't apply to me, but it sure feels like in a work remotely era it will push a lot of people to leave.

EDITORIAL: California wealth tax proposal would apply to non-residents

The wealth tax isn't something that would affect me, but enacting a tax that applies the same tax year with 3 months left is worrisome. The US debt has ballooned, so I can envision long term capital gains, and additional taxes with lower tiers nationally.

 

[LN1_Casey]

Selling weekly option WILL reset the holding period. Only thing that won't impact the holding period is selling OTM covered call more than a month away.

EDIT

Eh? I've never heard that, and couldn't find it.

Tax Treatment For Call & Put Options

• Mary owns 100 shares of Microsoft Corporation (MSFT), trading at $46.90, and she writes a $50 strike covered call, with September expiry, receiving a premium of $0.95.

1. If the call goes unexercised, say MSFT trades at $48 at expiration, Mary will realize a short-term capital gain of $0.95 on her option.
2. If the call is exercised, Mary will realize a capital gain based on her total position time period and her total cost. Say she bought her shares in January of 2014 for $37, Mary will realize a long-term capital gain of $13.95 ($50 - $36.05 or the price she paid minus call premium received).
3. If the call is bought back, depending on the price paid to buy the call back and the time period elapsed in total for the trade, Mary may be eligible for long- or short-term capital gains/losses.

The key is selling out of the money calls. Only selling calls that are in the money may reset your time if it falls within a certain set.

For example, Mary has held shares of MSFT since January of last year at $36 per share and decides to write the June 5 $45 call receiving a premium of $2.65. Because the closing price of the last trading day (May 22) was $46.90, one strike below would be $46.50, and since the expiry is less than 30 days away, her covered call is unqualified and the holding period of her shares will be suspended. If on June 5, the call is exercised and Mary’s shares are called away, Mary will realize short-term capital gains, even though the holding period of her shares were over a year.

As such, my selling a weekly call against my long term shares doesn't make them short term from the first instance. The premium is short term gain, but if the calls are called away, it's still a long term gain at the strike because the calls were out of the money when sold.

 

[kengchang]

Eh? I've never heard that, and couldn't find it.

Tax Treatment For Call & Put Options
The key is selling out of the money calls. Only selling calls that are in the money may reset your time if it falls within a certain set.



As such, my selling a weekly call against my long term shares doesn't make them short term from the first instance. The premium is short term gain, but if the calls are called away, it's still a long term gain at the strike because the calls were out of the money when sold.

By definition, selling weekly call is non-qualified call, the same as selling ITM covered call.

EAP is back

 

[LN1_Casey]

By definition, selling weekly call is non-qualified call, the same as selling ITM covered call.

Unless you can provide a link to support this claim, I don't believe you. The link I provided above specifically says otherwise.

 

[Knightshade]

Unless you can provide a link to support this claim, I don't believe you. The link I provided above specifically says otherwise.

Possibly you missed this post-

One note- selling non-qualified covered calls does reset the holding period in some cases.


See-
What Are The Tax Implications of Covered Calls? - Fidelity

• If a non-qualified covered call is sold against a stock position that was held less than one year, then the holding period for that stock is terminated.

 

[redan]

Selling weekly option WILL reset the holding period. Only thing that won't impact the holding period is selling OTM covered call more than a month away.

EDIT

I agree with @LN1_Casey. I do not believe this is correct, but please let me know otherwise. Apologies to our non-US friends, but I believe this is on-topic and on-point because so many people have asked about selling calls/puts lately. From the applicable IRS publication (Publication 550 (2019), Investment Income and Expenses | Internal Revenue Service) (emphasis added):

Writers of puts and calls.

If you write (grant) a put or a call, do not include the amount you receive for writing it in your income at the time of receipt. Carry it in a deferred account until:

• Your obligation expires;
  
  
• You buy, in the case of a put, or sell, in the case of a call, the underlying stock when the option is exercised; or
  
  
• You engage in a closing transaction.

If your obligation expires, the amount you received for writing the call or put is short-term capital gain.

If a put you write is exercised and you buy the underlying stock, decrease your basis in the stock by the amount you received for the put. Your holding period for the stock begins on the date you buy it, not on the date you wrote the put.

If a call you write is exercised and you sell the underlying stock, increase your amount realized on the sale of the stock by the amount you received for the call when figuring your gain or loss. The gain or loss is long term or short term depending on your holding period of the stock.

If you enter into a closing transaction by paying an amount equal to the value of the put or call at the time of the payment, the difference between the amount you pay and the amount you receive for the put or call is a short-term capital gain or loss.

Examples of nondealer transactions.

1. Expiration. Ten JJJ call options were issued on April 11, 2019, for $4,000. These equity options expired in December 2019 without being exercised. If you were a holder (buyer) of the options, you would recognize a short-term capital loss of $4,000. If you were a writer of the options, you would recognize a short-term capital gain of $4,000.
   
   
2. Closing transaction. The facts are the same as in (1), except that on May 9, 2019, the options were sold for $6,000. If you were the holder of the options who sold them, you would recognize a short-term capital gain of $2,000. If you were the writer of the options and you bought them back, you would recognize a short-term capital loss of $2,000.
   
   
3. Exercise. The facts are the same as in (1), except that the options were exercised on May 23, 2019. The buyer adds the cost of the options to the basis of the stock bought through the exercise of the options. The writer adds the amount received from writing the options to the amount realized from selling the stock to figure gain or loss. The gain or loss is short term or long term depending upon the holding period of the stock.
   

 

[Knightshade]

...nothing in what you quote addresses the actual question (which is how does selling a call impact the holding period of the underlying stock)

It's almost entirely about if gains themselves are short or long term based on the holding period- without addressing what either suspends or resets the holding period.

 

[redan]

...nothing in what you quote addresses the actual question (which is how does selling a call impact the holding period of the underlying stock)

It's almost entirely about if gains themselves are short or long term based on the holding period- without addressing what either suspends or resets the holding period.

By definition it addresses the question. If it resets the holding period every time you wrote a call, then every call that is exercised in under one year from the date of writing of the call would result in short-term gain.

Look at the IRS example - call written April 11, 2019 and exercised May 23, 2019. If the holding period is reset on April 11, 2019 when written, then how could you ever have a long term capital gain on May 23, 2019? It appears to me writing an OTM option does not impact the holding period of the underlying stock.

Note, I'm only addressing OTM options.

 

[Knightshade]

By definition it addresses the question. If it resets the holding period every time you wrote a call

nobody has made such a claim.


If it resets the holding period or not depends on the nature of the call written and how long you've already held the underlying stock..

It DOES in some cases, but not in others.

The document you cited does not cover that fact- but the link I provided earlier does.

 

[redan]

nobody has made such a claim.

The post I responded to from @kengchang did make that claim - that writing a weekly call reset the holding period except OTM calls more than a month away.

Selling weekly option WILL reset the holding period. Only thing that won't impact the holding period is selling OTM covered call more than a month away.

EDIT

I posted to clarify that writing an OTM call would not reset the holding period (no matter the duration, specifically, it would not re-set the holding period if you wrote a weekly). I provided an IRS example to prove that point.

I specifically did not address ITM calls, I agree that there are different rules for those. And I had you on ignore for needlessly dragging people down your rabbit hole, so I didn't see your initial response to @LN1_Casey with the Fidelity document, which changes nothing that I've said. So unless you disagree that selling an OTM option for any duration can in fact reset your holding period, we are apparently in agreement.

 

[dc_h]

...nothing in what you quote addresses the actual question (which is how does selling a call impact the holding period of the underlying stock)

It's almost entirely about if gains themselves are short or long term based on the holding period- without addressing what either suspends or resets the holding period.

Exactly! The gains from the call are short term, but the held stock is still held stock. If I owned the stock for 9 months or 18, that is not affected by a covered call, unless it’s called. IANAA and don’t play one on tv.

 

[LN1_Casey]

By definition it addresses the question. If it resets the holding period every time you wrote a call, then every call that is exercised in under one year from the date of writing of the call would result in short-term gain.

Look at the IRS example - call written April 11, 2019 and exercised May 23, 2019. If the holding period is reset on April 11, 2019 when written, then how could you ever have a long term capital gain on May 23, 2019? It appears to me writing an OTM option does not impact the holding period of the underlying stock.

Note, I'm only addressing OTM options.

While I agree with you agreeing with me, I think the argument is that it's outside of the 30 days from the date of writing to exercised, so the example is of a +30 day difference (April 11 to May 23).

But still, digging through the IRS form, it really doesn't give any impression that writing a call that expires within 30 days will reset the long/short term gain of the underlying stock. And, with such a dramatic change in tax owed, and such an easy rule (if you sell options that expire within 30 days, it's a short term gain), why would they not list this in the section dedicated to selling call options? If nothing else, link to the applicable section?

It doesn't even mention qualified or unqualified call options until much further down, when it's discussing straddle rule in reference to deferred losses/gains, as well as stocks granted by an employer.

 

[Knightshade]

I didn't see your initial response to @LN1_Casey with the Fidelity document, which changes nothing that I've said. So unless you disagree that selling an OTM option for any duration can in fact reset your holding period, we are apparently in agreement.

I do disagree, because the Fidelity document literally says it can reset your holding period if the written call is unqualified and the underlying shares have been held less than a year.

• If a non-qualified covered call is sold against a stock position that was held less than one year, then the holding period for that stock is terminated.

Also found a relevant bit in the giant IRS doc

Gains and holding period. If you held the substantially identical property for 1 year or less on the date of the short sale, or if you acquired the substantially identical property after the short sale and by the date of closing the short sale, then:
Rule 1. Your gain, if any, when you close the short sale is a short-term capital gain; and

Rule 2. The holding period of the substantially identical property begins on the date of the closing of the short sale or on the date of the sale of this property, whichever comes first.

A covered call sold posts as being short.... the actual shares you sold against would be the substantially identical property.

So if you held the underlying shares for less than 1 year the holding period RESETS to the close of the short or the selling of the shares themselves (like if option is exercised).

Presumably qualified covered calls are exempt from this, as noted elsewhere.

 

[bkp_duke]

looks like its for people with over 30 million, and could tax you for up to 10 years after you leave. It doesn't apply to me, but it sure feels like in a work remotely era it will push a lot of people to leave.

EDITORIAL: California wealth tax proposal would apply to non-residents

Am I missing something here? Doesn't this seem like it would be a VAST over-reach by CA state to try to pull revenue long after someone had given up any semblance of legitimate residency?

I cannot possibly see this working without the largest of legal battles, possibly as high as the US Supreme Court, since it involves multiple states.

 

[LN1_Casey]

Am I missing something here? Doesn't this seem like it would be a VAST over-reach by CA state to try to pull revenue long after someone had given up any semblance of legitimate residency?

I cannot possibly see this working without the largest of legal battles, possibly as high as the US Supreme Court, since it involves multiple states.

That bill will never make it off the floor. It's a tax on the person's wealth--including stock holdings! So, in theory, the wealthy would be taxed more than they earned in a year--every year. Let alone into the fact they're trying to prevent rich people from leaving.

The article was definitely biased, and framed it like this was a possibility of passing. But it's just a bill put out so a politician can say they're serving their constituents, and it'll die forgotten on the floor.