That means that your holding period is reset when you exercise the option. 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.

Can I Claim the Loss on Unexercised Stock Options? | Pocketsense

As mentioned, option writers receive premiums for their efforts. When a put or call option expires, you treat the premium payment as a short-term capital gain realized on the expiration date. This is true even if the duration of the option exceeds 12 months. If you wrote the option in the year before it expires, there are no tax consequences in the earlier year.

Overview of tax issues

If you write a put option that gets exercised meaning you have to buy the stock , reduce the tax basis of the shares you acquire by the premium you received. Again, your holding period starts the day after you acquire the shares. If you write a call option that gets exercised meaning you sell the stock , add the premium to the sales proceeds. Your gain or loss is short term or long term, depending on how long you held the shares.

With a closing transaction, your economic obligation under the option you wrote is offset by purchasing an equivalent option.

MANAGING YOUR MONEY

For example, say you write a put option for 1, shares of XYZ Corp. You now have both an obligation to buy under the put option you wrote and an offsetting right to sell under the put option you bought. For tax purposes, the purchase of the offsetting option is a closing transaction because it effectively cancels the option you wrote. Your capital gain or loss is short term by definition.

The amount is the difference between the premium you received for writing the option and the premium you paid to enter into the closing transaction. Report the gain or loss in the tax year you make the closing transaction. For purposes of deducting losses from options, the preceding rules apply to so-called naked options. Say the put option expires near the end of the year. Any excess loss is deferred until the year you sell the stock. See IRS Publication at www. Economic Calendar.

Brokers do not provide enough detail to identify which stock transactions should be adjusted and which option transactions should be deleted. See our User Guide for details. Put selling, or writing puts, is quite popular in a bull market. The advantage of this strategy is that you get to keep the premium received from selling the put if the market moves in two out of the three possible directions.

If the market goes up, you keep the premium, and if it moves sideways, you keep the premium. Time decay which is inherent in all options is on your side. Quite a nice strategy.

Ask a Fool: I Sold Stocks at a $10,000 Loss in 2021 -- Can I Write It Off?

Since the focus of our site is trader taxes, and not a commentary on various option trading strategies, we will concentrate our discussion on the potential problems that this particular strategy sometimes creates when attempting to prepare your taxes from trading. If the market heads down one of the three possible directions , you may find yourself owning the stock as the option may get exercised and the stock gets put to you at the strike price.

IRS Publication states that if you are the writer of a put option that gets exercised, you need to "Reduce your basis in the stock you buy by the amount you received for the put. This may sound simple, but as usual when it comes to taxes and the real world, nothing is quite that simple as the following example will show:.

But according to the IRS rules, when preparing his taxes, Joe needs to reduce the cost basis of the 1, shares by the amount he received from selling the put.

But like I said, nothing in the real world is easy. What happens if the ten contracts do not all get exercised at the same time? How does the premium received from the puts get divided up among the various stock assignments?

The same goes for the three other purchases of , , and shares each with the remaining option premium divided accordingly. In addition, the option trade needs to be zeroed out because the amount received from the option sale has been accounted for when reducing the stock cost basis. Now you would think all of this required accounting would be taken care of by your stock brokerage. Prior to tax year, most brokers simply report the individual option sale and stock purchase transactions and leave the rest to you.

Some brokers attempt to identify the exercised options and the corresponding stock assignments, but leave much to be desired in the way they do so. This is an extremely difficult, if not impossible problem to overcome with any automated trade accounting and tax software program. Few, if any, tax software programs designed for traders or investors handle this without much fuss and manual adjusting.

Thankfully, TradeLog is able to make all such necessary adjustments with just a few clicks of your mouse!

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Please see our Broad-Based Index Options user guide page for a complete list of index options marked by TradeLog as section contracts. TradeLog also allows users to define additional securities as broad-based index options in the Global Options settings. Since these do not settle in cash, as do most section contracts, some suggest that these are not section contracts. Others feel that they meet the definition of a "broad-based" index option and therefore can be treated as section contracts.

As always, it is best to contact your tax professional for advice before arbitrarily categorizing your index options trades. Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Cogenta Computing, Inc. You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation. When a Put : If you are the holder: If you are the writer: Is sold by the holder Report the difference between the cost of the put and the amount you receive for it as a capital gain or loss.