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Author: s2g One star, 50 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: options tax reporting emergency Date: 10/13/2010 2:22 PM
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Hi...

So many questions. I have been searching the boards, but I am giving in. Please respond in whatever detail would be helpful to fully answer the question.
1) writing repeated covered calls...Is each short call a single taxable event, assuming the stock does not get called away? If I write 3 covered calls on the same stock in 2009, is each taxed, even though i continued to hold the stock, or do I just let it all ride until i sell the stock (maybe in 2010) and then adjust the basis?

2) I am assuming, but I may be wrong, that writing short calls on leaps is fundamentally different for tax purposes than writing them on stocks. Is the relationship just in our minds, or is there some actual tax relationship as well. I am thinking of our diagonals, which will have had many taxable trades before we close them out, for those of us trading in taxable accounts.

I have postponed filing until this Friday 10/15. Our software seems to be more trouble than it is worth at the moment, as does my broker, so i am working pencil in hand. Any good advice, even stuff I haven't thought of, would be helpful. I won't be introducing any new software between now and friday.

Thanks, and if you want to send me your answer directly too, that would be great!!!

s2g
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111258 of 121061
Subject: Re: options tax reporting emergency Date: 10/13/2010 3:22 PM
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So many questions. I have been searching the boards, but I am giving in.

The search feature here is generally described as something between bad and awful. So I'm not surprised you didn't find anything.

writing repeated covered calls...Is each short call a single taxable event, assuming the stock does not get called away?

Yes.

If the stock is called away, the amount you received when you wrote the call is additional sale proceeds.

I am assuming, but I may be wrong, that writing short calls on leaps is fundamentally different for tax purposes than writing them on stocks.

You've got me there. I thought LEAPS were just long-dated options. So I'm not sure what transaction you have there. Can you write an option on an option?

--Peter

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Author: s2g One star, 50 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111261 of 121061
Subject: Re: options tax reporting emergency Date: 10/13/2010 6:59 PM
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Hi Peter,

Yes, you can use a long call to cover a short call.

Thank you for your answer. I would like to clarify.
What I thought was that if you owned stock X and wrote a covered call on it which expired worthless, or you bought back, or rolled out, and you did this repeatedly, that these events would be looked at as a whole, for tax purposes, and would be calculated into the basis of Stock X's price when you sold it. So, even if some of the options transactions took place, and were completed in year one, if the stock was not sold until year 2, the gains or losses from the options trades would not be reported until year two, and evn then, would be reported with referrence to stock X's basis, either raising or lowering it.

Your answer suggests that I am wrong. Based on your answer, i am thinking that any completed option transaction with referrence to stock X, in year one, has to be reported as income/loss in year one, even if ou still hold stock X. In year two, any completed option transaction, is reported as a seperate taxable event, except maybe one that results in stock X being called away. Would that one be tied directly into the stocks basis, or do you still just report it as seperate income

I thought I understood this, but now that I actually have to DO IT, I am confused.

s2g

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111263 of 121061
Subject: Re: options tax reporting emergency Date: 10/13/2010 7:14 PM
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Yes, you can use a long call to cover a short call.

OK. That's what you're doing. The purchase of the long call would close out your position and be a taxable event. (Assuming the call dates and strike prices are the same, of course.) So while technically you still have a long call and a short call, you have no risk in the pair of positions taken together. So for tax purposes, you'd have a gain or loss based on the difference between the sale price of the short call and the purchase price of the long call.

Now if you also own the underlying security (the stock), you've got a mess on your hands. I'm not sure what the tax treatment would be. But I bet the folks at fairmark.com would. They are very good at options there.


What I thought was that if you owned stock X and wrote a covered call on it which expired worthless, or you bought back, or rolled out, and you did this repeatedly, that these events would be looked at as a whole, for tax purposes, and would be calculated into the basis of Stock X's price when you sold it.

Nope. You thought wrong. As long as the covered call is not exercised, the option and the stock remain separate for tax purposes. So you recognize a gain or loss on each option position as it is closed - whether it is closed by expiration, buy/sell to close, or purchase/sale of an offsetting call. Only if the call is exercised are the call and the stock combined for tax purposes.

Based on your answer, i am thinking that any completed option transaction with referrence to stock X, in year one, has to be reported as income/loss in year one, even if ou still hold stock X.

That is correct.

Would that one be tied directly into the stocks basis,

Yes. Well, sort of. We're dealing with covered calls. So the option premium you receive when you sell the call would be considered as additional sale proceeds and added to the strike price you receive for the stock.

--Peter

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Author: s2g One star, 50 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111265 of 121061
Subject: Re: options tax reporting emergency Date: 10/13/2010 9:19 PM
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THANK YOU PETER!

One more double check...Bought stock X for $22, sold $23 strike call for $1. X gets called away for $23. I have held stock X for more than 12 months at the time X gets called away (Did not sell an "in the money" call). According to my reading of your explanation, my sale price would be $24 for tax purposes, so a $2 gain, all long term, not a sale price of $23, $1 long term gain, and short term option income of $1. Is that correct?

Thanks for you help,
Sarah

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111266 of 121061
Subject: Re: options tax reporting emergency Date: 10/13/2010 9:27 PM
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Bought stock X for $22, sold $23 strike call for $1. X gets called away for $23. I have held stock X for more than 12 months at the time X gets called away (Did not sell an "in the money" call). According to my reading of your explanation, my sale price would be $24 for tax purposes, so a $2 gain, all long term, not a sale price of $23, $1 long term gain, and short term option income of $1. Is that correct?

Yep. You've got it.

--Peter

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Author: CheersSRX One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111267 of 121061
Subject: Re: options tax reporting emergency Date: 10/13/2010 9:27 PM
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Sarah:

I am most definitely NOT an expert; not a tax accountant. So take my advice at your own risk. But I have written covered calls and reported them on tax returns. In fact, to be accurate, a highly paid tax accountant completed my Schedule D based on the information I provided.

I totally think the latter is correct, not the former. You have a $1 long term gain on the sale of the stock and a $1 short term gain on the option. To be literal, you most definitely did not sell the stock at $24, you sold it at $23. I don't know of anything in the tax code that would instruct you to change the actual sale price. Wouldn't make logical sense, and as you indicate, would make the tax reporting tricky, since there is a long-term component and a short-term component.

Now, that said, our Government is not known for it's common-sensical approach to such things. In fact, quite the opposite. But all that said, I do believe the second part of your post is the proper tax treatment.

Cheers!

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Author: s2g One star, 50 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111268 of 121061
Subject: Re: options tax reporting emergency Date: 10/13/2010 9:30 PM
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X
Sarah

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111269 of 121061
Subject: Re: options tax reporting emergency Date: 10/13/2010 9:34 PM
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I am most definitely NOT an expert; not a tax accountant.

I am.

You are wrong. A quick google search should provide the reference if you need.

--Peter

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Author: CheersSRX One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111270 of 121061
Subject: Re: options tax reporting emergency Date: 10/13/2010 9:38 PM
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My apologies for sticking my nose in where it clearly does not belong.
Cheers

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111271 of 121061
Subject: Re: options tax reporting emergency Date: 10/13/2010 10:23 PM
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And my apologies for the snarky response. It was uncalled for.

--Peter

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Author: stockmover Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111273 of 121061
Subject: Re: options tax reporting emergency Date: 10/14/2010 2:33 AM
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Hey Cheers

My apologies for sticking my nose in where it clearly does not belong.

We know that you were just trying to help out here, but as Donna405 said in an earlier post ... is that this Board is inhabited by CPA's, professional tax preparers and former IRS employees. One need go no further than listen to their advice. Sometimes their advice, on rare occasion, consists of consulting with a CPA or qualified tax adviser.

Best Regards,

Rich

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