Tax implications of option selling

[MikeC]

Sorry, I didn't see this until now. It all depends whether the option trade expires in or out of the money.

End of Year Position Reporting

Do you want to close a position before the end of the year to harvest a profit or loss? If you wish to have a position report as a profit or loss, please be aware there are deadlines to close a position to count towards the 2023 tax year. 2023 ...

tastyworks.freshdesk.com

Thanks, this was helpful:

"Long and short options that expire out-of-the-money and worthless on Friday, December 31, 2021, will act as the "closing transaction." As a result, the loss or gain from the option will report in the 2021 tax year."

 

[MP3Mike]

You do a few thousand option trades per year and you end up wading though spreadsheets to recreate/reconnect complex trades/rolls so you can generate your account's P/L for quarterly estimated taxes for both state/fed returns. It gets even uglier when you have multiple accounts (cash, trust, 529s).

I don't understand the issue. You don't need to reconnect trades/rolls you just total up the gains and reportable loses for all the transactions. Even a roll is just multiple individual transactions, there is no special tax treatment where you combine them is there? (I understand you wanting to track the results of an individual trade chain, but that doesn't have anything to do with taxes.)

I fully get what you are saying if you are trying to determine wash sales between multiple accounts.

 

[Boomer19]

Since I am naked - was able to close out all Puts and Spreads (only HODL'ing LT shares and Leaps right now) yesterday -
Decided to have some fun....
Buy / Write - Buy at $1137 - Write $1175 for this Friday.
If it doesn't hit - open next week for the same until the week of the 21st. Then set it higher and collect all the sweet come and get it premium.

This is only 5 contracts so nothing monumental but ends up about $25k if it hits this week and slowly builds till earnings or I just have 500 more shares of TSLA that I want to get called away with I dare you CC's

Something to remember for US based accounts - ****make sure to set your cost basis to LIFO or Last in First out for these contracts****
this way your long term shares do not get called away.

Still looking for a good BPS for next week and feel like $1100 / $800 is pretty solid for $26 and some easy management.
Cheers!

good reminder on the tax lots selection.

i launched the tax optimizer app that IB provides to select my specific tax lots the other night and the UI wasn’t fitting the macbook screen correctly so i couldn’t see the lots i needed to match.

i finally fixed it but if i was locked into a sale on 12/31 at a cost basis of $45 instead of $1000+ i would have stroked out.

(although i realize i’d have been able to contact them to resolve it..but still, who has that kind of time?)

 

[Boomer19]

In a mixed taxed account, that change would apply to all securities, mutual funds, as well. This morning I STO a BPS for the wrong date, adding to an existing position same strike long and short. I quickly BTC the same number of shares I added, finding that I had taken profit but now have a position with a much lower average cost. It all adds up in that if allowed to expire worthless, overall profit is the same. Would that have been averted if cost bases were set to LIFO? It is set FIFO at moment.

depending on broker there should be a default setting. some let you change default or choose specific lots within a certain time constraint.
for example my prior post above, i had two recent lots and many much older lots at lower cost basis, but wanted to choose the lot with the lower cost basis of the most recent two. i chose highest short term gain, or i could’ve chosen specific lots.

other choices, which wouldn’t have helped me achieve my objective in this particular trade were; lifo, fifo, highest cost, lowest cost, highest LT gain, highest ST gain

 

[M3Rider]

I used to sell Puts more than a year out (thinking incorrectly that those would be taxed as long term gains).

I have a few puts close to 1y.o., but none expired yet.

Can you clarify? If position was over 1yo, it was not treated as long term and taxed at short term rates? What do you mean by “incorrectly”?

 

[BornToFly]

I have a few puts close to 1y.o., but none expired yet.

Can you clarify? If position was over 1yo, it was not treated as long term and taxed at short term rates? What do you mean by “incorrectly”?

Yes, it turns out that all option SALES are treated as short term capital gains, even if the expiration is more than a year out and you hold them for more than a year. (When I started I thought that if I held the contract more than a year, the money I received for the premium would be taxed as long term gains - they aren't). I called Fidelity to clarify and they pointed me to the part of the IRS tax code that explains this and I read it with my own two eyes (I would not be able to find that page in the tax code at this point).

 

[stealthyc]

Yes, it turns out that all option SALES are treated as short term capital gains, even if the expiration is more than a year out and you hold them for more than a year. (When I started I thought that if I held the contract more than a year, the money I received for the premium would be taxed as long term gains - they aren't). I called Fidelity to clarify and they pointed me to the part of the IRS tax code that explains this and I read it with my own two eyes (I would not be able to find that page in the tax code at this point).

Important to note though that the tax applies in the year that the position closes by assignment, sale, or expiration. So you can get the cash for a LEAP up to 2 years in advance of when you have to pay tax on it if you hold to the bitter end.

 

[OrthoSurg]

Important to note though that the tax applies in the year that the position closes by assignment, sale, or expiration. So you can get the cash for a LEAP up to 2 years in advance of when you have to pay tax on it if you hold to the bitter end.

So if I sold a -p1500 20/1/2023, on January 4th, the tax will be due for this year since the contract was sold in 2022. Not when it is assigned of expired worthless in 2023?

 

[kcveins]

So if I sold a -p1500 20/1/2023, on January 4th, the tax will be due for this year since the contract was sold in 2022. Not when it is assigned of expired worthless in 2023?

This is not my understanding
The tax is due when the position is closed - you have an open position when you sold the contract and is closes when you BTC, it gets assigned or expires

 

[kabin]

I don't understand the issue. You don't need to reconnect trades/rolls you just total up the gains and reportable loses for all the transactions. Even a roll is just multiple individual transactions, there is no special tax treatment where you combine them is there? (I understand you wanting to track the results of an individual trade chain, but that doesn't have anything to do with taxes.)

I fully get what you are saying if you are trying to determine wash sales between multiple accounts.

The more options positions traded the more confusing it is to follow/remember what the original trades were. If you like to diversify and evaluate your trade types it's helpful to be able to track them from start to finish. There might not be anything worse than seeing a slew of options and wonder how the heck did I get here or which position is associated with the first trade, etc. Of course each option trade is associated with a different debit/credit so it's important to know that before closing, knowing the P/L for estimated quarterly taxes. There's a slew of reasons to want to be able to keep and track trades throughout rolls.

 

[MP3Mike]

There's a slew of reasons to want to be able to keep and track trades throughout rolls.

Sure, but unless I am missing something, none of those reasons are related to what you send to your accountant/tax person to estimate your taxes. That is just purely transactional data.

 

[SinghCo]

Yes, it turns out that all option SALES are treated as short term capital gains, even if the expiration is more than a year out and you hold them for more than a year. (When I started I thought that if I held the contract more than a year, the money I received for the premium would be taxed as long term gains - they aren't). I called Fidelity to clarify and they pointed me to the part of the IRS tax code that explains this and I read it with my own two eyes (I would not be able to find that page in the tax code at this point).

It seems in Canada it is taxed at half of capital gains as income whether it's one day or 50 years so no short term vs long term capital gains. I am going to close my sold long term puts and use shorter term for more returns then!

Only thing I am not sure of is when the number of trades become treated as full income. Right now working full time so only do this then and there so nothing to worry about. Down the line if I decide to do this full time it might get a little grey.

Key Differences Between Canada and US Tax - Capital Gains — Venture CFO

Great article for Canadians:

https://ca.rbcwealthmanagement.com/documents/29328/29356/Taxation_of_options_transactions_04132018_high.pdf/c632c8ea-0e32-4e55-9c5d-f8475c09fa75

 

[generalenthu]

Sorry, I didn't see this until now. It all depends whether the option trade expires in or out of the money.

End of Year Position Reporting

Do you want to close a position before the end of the year to harvest a profit or loss? If you wish to have a position report as a profit or loss, please be aware there are deadlines to close a position to count towards the 2023 tax year. 2023 ...

tastyworks.freshdesk.com

I had some short options contracts that expired on 12/31. IBKR is showing these as gains for 2022 and not 2021 as I was expecting. Waiting to see if this changes after the tax reports come out.

I'd much rather the gains in these be considered for 2022, but lets see.

 

[BornToFly]

I had some short options contracts that expired on 12/31. IBKR is showing these as gains for 2022 and not 2021 as I was expecting. Waiting to see if this changes after the tax reports come out.

I'd much rather the gains in these be considered for 2022, but lets see.

That is the way it is for me with Fidelity. I closed CC for a loss on Dec 31 2020 planning on taking the loss in 2020, but they didn't settle until 2021, so I had to pay a lot more in taxes in 2020 than I planned. But I will have those deductions this April for my 2021 taxes. Similarly, I postponed gains in 2021 by closing contracts on Dec. 31 2021, and they are showing up for me as income in 2022 (which is what I wanted).

 

[Boomer19]

I had some short options contracts that expired on 12/31. IBKR is showing these as gains for 2022 and not 2021 as I was expecting. Waiting to see if this changes after the tax reports come out.

I'd much rather the gains in these be considered for 2022, but lets see.

What i found on tasty

Tastytrade Help Center

support.tastyworks.com

Last Day to Close Positions for 2021 Tax Reporting​

LONG STOCK/ETF SHARES, LONG OR SHORT EQUITY OPTIONS, AND BROAD-BASED INDEX OPTIONS​

Trade Date: Friday, December 31, 2021

Profits or losses for long stock/ETF shares, long or short equity/ETF options, and Broad-Based Index Options* (i.e., SPX, NDX, VIX, etc.) report based on their trade date. As a result, any long stock/ETF share position, individual option, or option spread position must be closed by Friday, December 31, 2021, if you wish to report the gain or loss for the 2021 Tax Year.

Long and short options that expire out-of-the-money and worthless on Friday, December 31, 2021, will act as the "closing transaction." As a result, the loss or gain from the option will report in the 2021 tax year.

Unfortunately, losses on long options that expire in 2022 that do not have a bid price ($0.00) cannot be harvested in 2021 unless they are closed. You must carry any long options with a $0.00 bid that cannot be closed to the 2022 calendar year. Only realized losses can get reported, which requires an option to be closed or expire worthless.

 

[kabin]

Sure, but unless I am missing something, none of those reasons are related to what you send to your accountant/tax person to estimate your taxes. That is just purely transactional data.

I use it both to calculate my quarterly estimated taxes as well as tax harvest. Estimated quarterly taxes can result in quarterly payments to both the IRS and my state government. And then my CPA needs to know about those payments to accurately file my returns.

 

[Zhelko Dimic]

This is not my understanding
The tax is due when the position is closed - you have an open position when you sold the contract and is closes when you BTC, it gets assigned or expires

Canada and US tax treatments are very different.
No short term capital gains in Canada.
Unless you are "trading professional", in which case, everything counts as a regular income, but you have much more leverage to expense stuff, like it's a business.
@OrthoSurg having many, many transactions and doing weekly puts makes you a candidate for CRA to look if you a professional. It's fuzzy, and having no particular training in trading you may be judged to be only a speculator (not a professional).
This may be useful, but I suggest you find and read CRA bulletin (not that you will be clear, it's a CRA judgment call after all):

TaxTips.ca - Tax treatment of investments - capital or income?

TaxTips.ca - When are gains on losses on sales of investment considered capital gains or losses, and when are they considered income (100% taxable or deductible)?

www.taxtips.ca

Also I found this helpful and this is how I calculate my taxes:

https://www.taxtips.ca/personaltax/investing/taxtreatment/options.htm

BTW, CALL to ALL CANADIANS:
Do you have an accountant that knows how to calculate options profit/losses?
I haven't run into one yet.
Or at least a program that can automate calculation from the TD Direct reports?
My accountant gave up and passed ball back to me.
Please!!!
I'm sick and tired of calculating that stuff myself

 

[vikings123]

I'm looking for some inputs on wash sales for options spreads.

Given all the complicated options/spreads trading strategies we have out there, does anybody have any inputs on what are some key things to avoid getting hit with a wash sale gain disallowed. My understanding was that as long as you are not re-entering the same strike/expiry you should be fine. But I now realize I might have been wrong in my interpretation.

What are some rules/tracking tools people are using to avoid wash sales?

Does anybody have any articles/videos that would help me understand the details?

 

[OrthoSurg]

Let’s say I bought 1000 shares of TSLA at 100.
The stock goes to 200. My average purchase price is $100

I have a +100% realized gain if I sell these shares and pay taxes on the $100,000 I made.

Now, let’s say I sell 10 DITM puts at $300 and get assigned 1000 shares at $300 I then have 2000 shares with an average price of $200.
Then I sell my 1000 shares on the open market.

How will the taxes be calculated on that. The premium received from the option is all taxable when the contract was assigned or when the shares are sold?

Not clear to me yet.
Anyone knows?

Thanks!

 

[adiggs]

Let’s say I bought 1000 shares of TSLA at 100.
The stock goes to 200. My average purchase price is $100

I have a +100% realized gain if I sell these shares and pay taxes on the $100,000 I made.

Now, let’s say I sell 10 DITM puts at $300 and get assigned 1000 shares at $300 I then have 2000 shares with an average price of $200.
Then I sell my 1000 shares on the open market.

How will the taxes be calculated on that. The premium received from the option is all taxable when the contract was assigned or when the shares are sold?

Not clear to me yet.
Anyone knows?

Thanks!

At least in the US, shares acquired or disposed of via option exercise has the option premium added / subtracted to the share purchase price.

Ex.... many, many years ago I sold $29 strike puts on TSLA for $1.70. At expiration the stock was around 27.50 (ITM), thereby causing me to buy shares at $29. For tax purposes the cost basis on those acquired shares was 27.30. Two splits later and they're $1.82. (Note that I might have the exact premium off - its been a decade )