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Strategies & Market Trends : Income Taxes and Record Keeping ( tax )
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To: Privately who wrote (5798)4/3/2024 2:34:11 PM
From: Elroy  Read Replies (1) of 5810
 
I have discussed it at length with TD tax people. In each case the tax person I've spoken to I can convince them that TD is doing it wrong. Then they refer it to the higher ups, and the higher ups see the request to change, and reject it.

The problem with TD's accounting of section 1256 options is they are forgetting to incorporate the fact that upon exercise the option is gone, therefore it's value is zero. They are doing the "mark to market" part as required, so a $3 in the money call is $3 of section 1256 profit. They are NOT doing the next step which is that exercising the call means the option is now worth zero, so the customer has the same $3 of loss. The result is option exercise "mark to market" means the option exercise is always zero gain/loss, and the 1256 gain loss is the premium received (gain) or paid (loss).

Example

I pay $1 premium for a $10 call on MLP

MLP has a current value of $20. TD reports to the partnership that I've bought units for $10. TD reports nothing to the partnership about the options transaction.

I exercise the call

My Section 1256 gain/loss calculation is

Mark to Market = $10 profit
Option gone due to exercise = ($10 loss)
Call Premium paid = $1 loss

My section 1256 loss on the exercise is $1 loss due to paying the $1 premium.

TD is reporting it as ($10 Mark to Market gain) - ($1 premium paid) = $9 section 1256 gain.

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If I immediatly same day sell MLP for the market price of $20, I would owe MLP capital gains of $10 since my cost basis reported to the MLP is $10 (the strike price).
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