Tax discussion, strategies and questions

[EV forever]

It’s math, you can’t disagree with it.

Part 2 is $550k into TSLA at $700 like you said (so 785.7 shares). If if then doubles to $1,400, you have $1.1M with a gain of $550k. Short term tax would be $275k as you laid it out, netting $275k in addition to the net from the first part of the trade, which netted $450k, so total net is $725k.

If the other scenario is also short term, you gain $1.3M and net $650k under the tax rate you presented. Obviously if you change that scenario to long term, you will pay less in taxes. The point is that you should consider the impact of a higher cost basis on your second sale if you are analyzing this type of situation.

Mind-boggling that there were disagrees on this post. Again, it’s just math.

Agree - it is math and folks need to decide what they are comfortable with. Stock price going from 100 to 1400 in one year is possible resulting in short term gains if sold within 1-year as TSLA has shown, but less likely.

For me, tax planning is more complicated than the examples above, particularly, if you are planning to hold TSLA for the very long term. There were three big changes in the 2017 tax law that had major potential effects.

First was the major change in the deductibility of state tax again the Federal tax. This primarily affects states like CA, which have very high state taxes. You can see that in examples given earlier on paying federal and state capital gains, particularly when CA doesn't have a lower long term capital gains rate.

Second, for people like me who hold our shares in tax free accounts (Mine are all in a Roth IRA). My plan is to have the Roth as an estate planning tool. The law changed the rules so that my beneficiaries can only hold the assets in an inherited Roth tax free for 10 years after my death (or my spouse whoever lives the longest) rather than their lifetime (with some RMD - required minimum distribution). This decreases the value of a Roth (although it still is very good - since it also doesn't require me to take any RMD).

Third, the estate tax limit was doubled (still increasing by inflation each year). This has a huge effect as TSLA shares increase in value. Mine, purchased in the Roth in late 2013 and early 2015, are approaching a 20 bagger, a level where, including our other assets, put estate tax into play. At 40% estate tax is significant (some states also have their own estate taxes on top of federal). However, the big unknown is whether this higher limit will end in 2026, since the increase in the estate tax limit sunsets then. It will take a new law to keep it going.

A fourth tax issue which is currently very advantageous, is that if you keep TSLA or any appreciated asset until your death, the cost basis of the asset is readjusted to the market value at your death. So if you keep TSLA long enough, you may escape any capital gains tax on its growth while you were alive.

Tax laws are definitely subject to change, so as your wealth in TSLA multiplies, you probably need to keep in mind some or all of these complications. At 75, I am probably much more aware than most of you about such things.

We haven't paid much attention to estate planning yet - in our late forties/early fifties now, other than having a living trust created. Our brokerage assigned financial advisor did mention this a couple of months back - since our TSLA holdings in my traditional IRA have grown to a ridiculous level. In addition to advising that I should sell and take profits, which I promptly ignored , he did point out that if we left this as an estate to our kid, with the new laws for RMD etc., a big chunk would be lost to taxes at that point. His recommendation was to start rollover into ROTH IRA - but with our current tax brackets, we would be paying almost half in taxes (yes, first world problems, cry me a river etc etc.). Most of my TSLA assets are in a traditional IRA, my husband does have a Roth IRA, but the holdings are much less - thanks to my super conservative hubby (I have posted that story sometime before - his holdings are mostly in bonds, that he actually pays Fidelity to manage)

Thanks for the mods to direct the discussion to an appropriate thread! Only thing I can add is, keep your shares as-is in your taxable account and use options if you have a high conviction on what the stock is going to do (both direction and timing).

This is exactly what I have been doing with my traditional IRA. Last year Sept - about 30% of my account was TSLA stock, with only about 1-2% call options. As of this morning, my IRA is at 20X of the value from Sept'19 with >90% in TSLA stock or options. After the S&P announcement couple of weeks back, I sold off 40% of the TSLA stocks in this account and converted the amount to call options (posted in the Trading thread).


Back to the original discussion regarding taxable account:
The scenario calculations posted are not entirely hypothetical, since I am trying to decide at what point it would be worth it to just take profit, taxes be damned. I have just over 1000 shares in another brokerage account - half of them are long term, the other half were bought during the March Covid related crash. I also have June'22 LEAPS that were bought about the same time - so still short term. Been trying to work out various scenarios to maximize my returns, keeping taxes in mind. If there is a crazy run up in stock price week of Dec 14-18, what to do?

• Sell all the LEAPS?
• Sell half the LEAPS and get the other half exercised into shares?
• Sell the long term stock and use the proceeds to exercise the LEAPS?

I had pretty much decided to sell half and exercise the 2nd half to add on to the shares. But all these will be now the low cost basis. But now, @Crowded Mind pointed out the advantage of starting with a higher cost basis, so maybe selling everything and buying shares is better option.

 

[Crowded Mind]

Agree - it is math and folks need to decide what they are comfortable with. Stock price going from 100 to 1400 in one year is possible resulting in short term gains if sold within 1-year as TSLA has shown, but less likely.

The prices in the scenario are not the point. You asked what you were missing. A higher cost basis on the new position is something that should be considered by anyone evaluating the type of trade being discussed. It should be considered whether the gains or losses are long term, short term, or any combination thereof.

Strategy is a different conversation. Personally, I think in and out like that is a horrible one.

 

[davidf31]

I need help answering questions about covered calls and holding periods.

Tax Implications of Covered Calls - Fidelity

I understand the tax implications of qualified and non-qualified covered calls on underlying stock from the fidielity link above.

My question is if the same rules apply to LEAPs and selling poor man's covered calls?

Scenario:

I just bought Jan 2023 Tesla LEAP Calls and will sell them some time after Jan 2022 to claim long term cap gains from the LEAPs. If I sell non-qualified covered calls such as weekly covered calls, will that reset my holding period for my LEAPs and thus my ability to claim long term cap gains on those LEAPs?

 

[LN1_Casey]

I need help answering questions about covered calls and holding periods.

Tax Implications of Covered Calls - Fidelity

I understand the tax implications of qualified and non-qualified covered calls on underlying stock from the fidielity link above.

My question is if the same rules apply to LEAPs and selling poor man's covered calls?

Scenario:

I just bought Jan 2023 Tesla LEAP Calls and will sell them some time after Jan 2022 to claim long term cap gains from the LEAPs. If I sell non-qualified covered calls such as weekly covered calls, will that reset my holding period for my LEAPs and thus my ability to claim long term cap gains on those LEAPs?

Just for clarity, you're selling covered LEAP calls and then also weekly covered calls on the same shares?

Or did you buy a covered LEAP, already have shares with which you're selling weekly covered calls?

If the latter, I wouldn't think those two things would overlap. One is buying of an option, which is held more than a year, and the other is selling an option of assets (may or may not be more than a year).

If the former, I think it does reset. I did research in this thread a bit back about weeklies and taxes, and I believe the US tax code does mention this scenario.

 

[davidf31]

Just for clarity, you're selling covered LEAP calls and then also weekly covered calls on the same shares?

Or did you buy a covered LEAP, already have shares with which you're selling weekly covered calls?

If the latter, I wouldn't think those two things would overlap. One is buying of an option, which is held more than a year, and the other is selling an option of assets (may or may not be more than a year).

If the former, I think it does reset. I did research in this thread a bit back about weeklies and taxes, and I believe the US tax code does mention this scenario.

I am long LEAPs that expire in 2023. Until I sell the LEAPs or let them expire, I will be selling covered calls against my LEAPs. If covered calls are about to expire ITM, I will buy to close those covered calls so my LEAPs don't get assigned away.

It sounds like you're saying the tax code will treat LEAPs and underlying stock shares as the same in regards to holding period.

 

[LN1_Casey]

I am long LEAPs that expire in 2023. Until I sell the LEAPs or let them expire, I will be selling covered calls against my LEAPs. If covered calls are about to expire ITM, I will buy to close those covered calls so my LEAPs don't get assigned away.

It sounds like you're saying the tax code will treat LEAPs and underlying stock shares as the same in regards to holding period.

So you don't actually have shares at the moment? Just the LEAPS?

I have no idea. I didn't even know you could sell covered calls based on a LEAPS and not actually holding the shares in hand. I do know that LEAPS, if held for more than 12 months, can be treated as long term the same as the shares themselves. I would assume, if the LEAPS are treated the same as shares for the purpose of covered calls, if sold OTM they shouldn't reset the holding period of the underlying asset.

But I'm not a tax lawyer, so might want to speak to one if you're really concerned.

 

[davidf31]

So you don't actually have shares at the moment? Just the LEAPS?

I have no idea. I didn't even know you could sell covered calls based on a LEAPS and not actually holding the shares in hand. I do know that LEAPS, if held for more than 12 months, can be treated as long term the same as the shares themselves. I would assume, if the LEAPS are treated the same as shares for the purpose of covered calls, if sold OTM they shouldn't reset the holding period of the underlying asset.

But I'm not a tax lawyer, so might want to speak to one if you're really concerned.

ya correct, just the LEAPs. you can sell covered calls if the covered call strike > LEAP strike b/c the LEAP can be exercised and the shares get assigned if covered call gets exercised or expire ITM.

 

[mongo]

The other advantage is that you don't have to pay tax on the money you pull out and spend.

I've lost the original focus of this discussion, so forgive me if this was speaking specifically to non-retirement accounts.
In the US, one cannot get a loan using an IRA as collateral without the amount getting taxed as a distribution.
Can Retirement Accounts Be Used As Collateral?
https://www.irs.gov/pub/irs-pdf/p590b.pdf

Pledging an account as security. If you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. You may have to pay the 10% additional tax on early distributions, discussed later.

 

[Mengy]

This thread makes tax planning seem very confusing, but after the research I've done it seems fairly simple to me?

I currently own a few thousand shares of TSLA. Not options, not calls, just shares mostly acquired in 2019 at an average cost of $110/shr post split. I don't plan on selling any until after I "retire" soon by quitting my day job so zero wage income then. After that I'll just sell small blocks of shares periodically to keep cash on hand for bills and such, but I only plan on selling $52,000 max worth per year. This will keep me under the 0% federal long term cap gains bracket as head of household, and I've minimized expenses to about $30K per year so that will give me a $20K yearly "fun" allotment.

Is it actually more complicated than that? Because the math doesn't seem all that complicated to me?

 

[Knightshade]

FWIW you might consider selling covered calls at that point... since you'd be fine selling the shares anyway, why not get paid an extra premium to do so?

Honestly with a few thousand shares you could probably sell far enough OTM weeklies to make 30k a year and NEVER sell your shares at all.

 

[troyhouse]

For the options experts here, need some guidance, tips, ideas:

I have 60x TSLA 01/15 376c, up like 4000% (short-term gains)....

So with sp500 inclusion week, what would be the best strategy to handle them. my goal is to exercise as many of them as possible with the proceeds from some of these options. Ideally, want to sell these options next year to delay tax payment in 2022.

My Options:
1. Do nothing, wait for Jan 1st week and then decide to sell partial and exercise rest of them (sell 30, use the proceeds to exercise 30)
2. During Week of 14-18 Dec, sell covered calls against the partial position, use the premium to exercise some, and then sell/exercise rest in Jan
3. Sell as little as possible this year on crazy sp bump, dont worry about tax, exercise rest of them..

Are there are any other ideas/options that I am missing out. Thanks in advance.

 

[MP3Mike]

Ideally, want to sell these options next year to delay tax payment in 2022.

I could be wrong but my understanding is that if you have a significant amount of taxable income that doesn't have taxes withheld you are required to make quarterly estimated tax payments. So you don't get to wait until 2022 to pay the taxes, your tax payment for Q12021 earnings will be due 4/15/2021. (There are exceptions, but it is something you should look in to.)

 

[troyhouse]

I could be wrong but my understanding is that if you have a significant amount of taxable income that doesn't have taxes withheld you are required to make quarterly estimated tax payments. So you don't get to wait until 2022 to pay the taxes, your tax payment for Q12021 earnings will be due 4/15/2021. (There are exceptions, but it is something you should look in to.)

good point.. but its still small manageable payments compared to lump sump.

 

[adiggs]

For the options experts here, need some guidance, tips, ideas:

I have 60x TSLA 01/15 376c, up like 4000% (short-term gains)....

So with sp500 inclusion week, what would be the best strategy to handle them. my goal is to exercise as many of them as possible with the proceeds from some of these options. Ideally, want to sell these options next year to delay tax payment in 2022.

My Options:
1. Do nothing, wait for Jan 1st week and then decide to sell partial and exercise rest of them (sell 30, use the proceeds to exercise 30)
2. During Week of 14-18 Dec, sell covered calls against the partial position, use the premium to exercise some, and then sell/exercise rest in Jan
3. Sell as little as possible this year on crazy sp bump, dont worry about tax, exercise rest of them..

Are there are any other ideas/options that I am missing out. Thanks in advance.

That's an awesome position to be in!

I don't have a lot for you, but I do have a bit. The first is that the time value on those options is about $3 if my math is correct. Therefore an early exercise will hand that time value over to whoever gets assigned. I would only exercise early if that time value is getting close to 0.

Even if you believed you were at a local maximum, if the time value isn't practically 0, I would be thinking in terms of selling the options over an exercise, as you can sell the calls and buy the shares in the same transaction. The benefit of doing so is that you can get the time value by selling the calls, over exercising. If it really is a local maximum, then selling and buying shares shortly after might even net you some extra shares


I've got some Jan '21 options as well, not nearly so far ITM. I want to wait till early Jan to close for the same reason. I sort of expect I'll be selling though the week of Dec 21. My expectation being that when the buying is done from inclusion, the share price will be coming back down, and it won't wait the extra week I need from it. I also don't think that however good the P/D report is in Jan, it will be enough to stop the shares from coming back down in price (I think, and am betting on, the share price being a lot higher around the 18th/21st, and then back down to $500-600 late Dec or Jan.

(If we get enough of an inclusion spike, I'm even thinking of buying some short term puts to take advantage of the after inclusion return to a more "reasonable" level).


The cc is an interesting idea. An idea there as well - sell the cc as you plan, but hang onto the premium for a few weeks afterwards for buying shares. You'd do this if you expect a drop after inclusion (especially if you think a share price and IV drop will go together) as the combo might create an early close opportunity, eliminating any possibility of being called away, and resolving the position profitably and faster.

 

[adiggs]

good point.. but its still small manageable payments compared to lump sump.

I'm not a tax expert, or even very knowledgeable amateur, but my understanding is that you need to have withheld pretty close to your tax due OR 10% more than the previous year's taxes. I better be right about that as my withholding is based on the latter, and I'm going to have a much bigger taxable income this year than ever before - the IRS is going to really appreciate hearing from me this year.

I'll be making estimated tax payments next year (no more paycheck withholding if nothing else), and I expect I'll be basing those on 10% more than this years taxes.

 

[MP3Mike]

good point.. but its still small manageable payments compared to lump sump.

The size of the payment is the amount of taxes that will be owed, so it isn't any different... And the estimated taxes for Sept-Dec, 2020 earnings (Yes, the tax quarters are weird and not strictly calendar quarter based.) are due January 15th, 2021. So if you sell this year make sure you leave enough money available to pay the taxes due by 1/15...

 

[ggr]

That's an awesome position to be in!

I don't have a lot for you, but I do have a bit. The first is that the time value on those options is about $3 if my math is correct. Therefore an early exercise will hand that time value over to whoever gets assigned. I would only exercise early if that time value is getting close to 0.

Even if you believed you were at a local maximum, if the time value isn't practically 0, I would be thinking in terms of selling the options over an exercise, as you can sell the calls and buy the shares in the same transaction. The benefit of doing so is that you can get the time value by selling the calls, over exercising. If it really is a local maximum, then selling and buying shares shortly after might even net you some extra shares


I've got some Jan '21 options as well, not nearly so far ITM. I want to wait till early Jan to close for the same reason. I sort of expect I'll be selling though the week of Dec 21. My expectation being that when the buying is done from inclusion, the share price will be coming back down, and it won't wait the extra week I need from it. I also don't think that however good the P/D report is in Jan, it will be enough to stop the shares from coming back down in price (I think, and am betting on, the share price being a lot higher around the 18th/21st, and then back down to $500-600 late Dec or Jan.

(If we get enough of an inclusion spike, I'm even thinking of buying some short term puts to take advantage of the after inclusion return to a more "reasonable" level).


The cc is an interesting idea. An idea there as well - sell the cc as you plan, but hang onto the premium for a few weeks afterwards for buying shares. You'd do this if you expect a drop after inclusion (especially if you think a share price and IV drop will go together) as the combo might create an early close opportunity, eliminating any possibility of being called away, and resolving the position profitably and faster.

I disagree with selling calls and buying stock with the proceeds, because this is clearly one of those times when the tax issue dominates.

Using @troyhouse's numbers, if he sells 60 contracts on Monday, assuming $3 time value and $600 TSLA stock price, $224 is the intrinsic value of the call, he raises 6000*$227 = $1,362,000. For this he can buy 2,270 TSLA shares (again assuming $600 stock price). Now, he's certainly in the top tax bracket (37%) even if he wasn't already, and this is short term, and I think Illinois has state tax (3.75% if I looked it up correctly), call it 40% tax is now owed. That is $544,800. I'm ignoring that he doesn't pay tax on the cost basis, because at 4000% who cares.

The alternative is to sell enough to cover the cost of exercising the rest. He makes $22,700 per contract sold. Exercise costs $37,600 per contract. 376/227=1.656, so he has to sell 60*1.656/2.656 = 38 contracts (can't sell partial contracts). That's $862,600 raised; tax on that is $345,040, which is a lot less, nearly $200,000 saved in tax. In return he buys 2,200 TSLA shares at a much lower cost basis, around $385/share (mental arithmetic here, I don't know how much he paid for the originals) which he can hold on to for over a year to become long term capital gains; when the stock eventually gets sold, the tax rate will be lower. The sacrifice is that he has 70 less shares, $42,000 worth, but he still wins by around $50,000 when the dust settles and gets to defer a lot of the tax until later years, versus selling all and buying at market.

Usual disclaimer applies. These posts should go into the tax issues thread. Maybe a mod will copy them over.

Edit added later: I forgot that he has cash left over, $35,400, because of the rounding up of the contract. With this he can buy 59 shares at market. So he ends up with only 11 fewer shares and some loose change.

 

[troyhouse]

Thanks @ggr @MP3Mike @adiggs Great info, very helpful.

My original avg cost was $5 for each contract, so 30k of the original investment.

I like @ggr approach, that was one of the options I was considering as well, to fund exercising shares from selling calls. I have a bunch of other similar positions in Jan and Mar 2021 so exercising will make sense.

Based on my calculations, I will have to sell between 20-35 contracts (out of 60) based on the sp to exercise rest of them. I was also thinking of selling covered calls for +100/+200 strike price, lets say next week, if sp goes to 700/800 in batches of 10 contracts. this gives me premium which I can save for taxes, or exercise other contracts.

I might also have an opportunity to move to no-state-income-tax state and might expedite that plan and execute next year.

So key is going to be patience for next 10-15 days, SP going to 800 or even 1000 (if lucky), SP not crashing drastically after inclusion, and I can execute this plan in Jan. Too many moving parts but at the end of the day, I am just grateful to be in this position due to TSLA.

 

[adiggs]

I disagree with selling calls and buying stock with the proceeds, because this is clearly one of those times when the tax issue dominates.

Using @troyhouse's numbers, if he sells 60 contracts on Monday, assuming $3 time value and $600 TSLA stock price, $224 is the intrinsic value of the call, he raises 6000*$227 = $1,362,000. For this he can buy 2,270 TSLA shares (again assuming $600 stock price). Now, he's certainly in the top tax bracket (37%) even if he wasn't already, and this is short term, and I think Illinois has state tax (3.75% if I looked it up correctly), call it 40% tax is now owed. That is $544,800. I'm ignoring that he doesn't pay tax on the cost basis, because at 4000% who cares.

The alternative is to sell enough to cover the cost of exercising the rest. He makes $22,700 per contract sold. Exercise costs $37,600 per contract. 376/227=1.656, so he has to sell 60*1.656/2.656 = 38 contracts (can't sell partial contracts). That's $862,600 raised; tax on that is $345,040, which is a lot less, nearly $200,000 saved in tax. In return he buys 2,200 TSLA shares at a much lower cost basis, around $385/share (mental arithmetic here, I don't know how much he paid for the originals) which he can hold on to for over a year to become long term capital gains; when the stock eventually gets sold, the tax rate will be lower. The sacrifice is that he has 70 less shares, $42,000 worth, but he still wins by around $50,000 when the dust settles and gets to defer a lot of the tax until later years, versus selling all and buying at market.

Usual disclaimer applies. These posts should go into the tax issues thread. Maybe a mod will copy them over.

Edit added later: I forgot that he has cash left over, $35,400, because of the rounding up of the contract. With this he can buy 59 shares at market. So he ends up with only 11 fewer shares and some loose change.

I agree with @ggr's point completely. I was thinking about the same thing overnight, but getting to that level of detail isn't something I would or could have done.

As I understand it, and to make this particularly clear, the key element of this approach is that when you exercise a purchased call, you are buying shares at the strike, and your cost basis becomes the strike price plus the premium you paid to acquire the contract. That delays the tax event where you get to pay taxes on those gains.

The same applies to taking purchased calls to expiration.

 

[Bill Price]

But, if you believe TSLA will keep appreciating for decades to come, this is a way to monetize your investment while keeping all your shares. This is what Elon does as well. He said he will be the last one selling. When that time comes his taxes will be ludicrous.

I believe that his taxes will be plaid?