<<..re: tax treatment of writing leaps...
If, the first week of January, 2000...you write contracts for Jan 2001 leaps, and they expire worthless in January 2001, is that a long-term cap gain or short-term gain? Is the tax due on the premium you collected in January 2000 not due until April, 2002?>>
From Publication 550, Investment Income and Expenses, For use in preparing 1999 tax returns, pages 52 and 53:
"Options
Writer of option.
If you write (grant) an option, how you report your gain or loss depends on whether it was exercised.
If you are not in the business of writing options [italics added] and an option you write on stocks, securities, commodities, or commodity futures is not exercised, the amount you receive is a short-term capital gain."
[Later]
" Writers of calls and puts.
If you write (grant) a call or a put, do not include the amount you receive for writing it in your income at the time of receipt. Carry it in a deferred account until:
1) Your obligation expires.
...........
...........
If your obligation expires, the amount you received for writing the call or put is short-term capital gain."
Note that the phrase if you are not in the business of writing options may possibly be subject to interpretation. My interpretation is that for an individual investor, who may trade in options for his own account, but who is NOT a market maker, or option broker, or dealer in options, but who may in fact make his ordinary living primarily through the process of writing options in his account, would qualify as someone who is not in the business of writing options. Others may have a different interpretation. By this interpretation, an option written, which expires, becomes a short-term gain to the writer as of the date of expiration, regardless of the time period involved.
Note: For an option with a life of over 12 months, this treatment is different from that of the BUYER of the option.
Again from Pub 550 page 53:
" Holders of calls and puts.
If you buy a call or a put, you may not deduct its cost. It is a capital expenditure. If you sell the call or the put before you exercise it, the difference between its cost and the amount you receive for it is either a long-term or short-term capital gain or loss, depending on how long you held it. If the option expires, its cost is either a long-term or short-term capital loss, depending on your holding period, which ends on the expiration date."
Note also: Your question is for tax treatment of an option written which expires in January 2001. Publication 550 from which I quote applies to income taxes for 1999. Assuming that the tax laws do not change for 2 more years (given the fondness of our elected representatives for screwing around with the tax code, that may or may not be a valid assumption), then the answer to your question is, you would have a short-term capital gain of income (nominally) received in 2001, even though you actually got the money in January 2000, and taxes on that income would be due in April 2002.
BP |
