I need what I assume is some simple tax advice
not to to be controversial but the above statement is an oxymoron. that is, when it comes to taxes, there is no such thing as simple.
I am not neither a tax accountant nor attorney. so obviously i can not give you tax advice.
the first thing that comes to mind is always consult one of these guys, the good ones will be worth every cent you pay since taxes can be very complicated. obviously each case is different.
as for your question:
. Can I treat the call I purchased as long-term capital gains? I have held them for well over a year and I presume the fact I had separate different strike calls I sold for purposes of the spread has nothing to do with it? Am I right.
I am going to give you this link that although addresses part of the question, in addition it addresses other topics that are relevant to your position, and further, i believe it gives you the ability to actually ASK THE QUESTION to an options expert (and most probably with a tax background)
Good luck.
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schaeffersresearch.com
This is a level 2 question.
Q: What is the best strategy for a very deep "in-the-money" option? Hold, sell, or take the shares? I don’t understand the advantages and disadvantages between selling a call that is 10 points in-the-money and a call that is 100 points in-the-money (which is what I have).
A: Only 100 points in the money? Not a bad trade. Congratulations on the discipline to ride such a winner. That is impressive. I hope you did the trade for size and you walk away with a million. As a whole, there really isn’t that much difference between a 10 dollar in-the-money and a 100 dollar in-the-money option other than the obvious profit amount. However, the biggest problem that I see for you is how to best turn that paper profit into actual cash. An option that is that deep in-the-money is usually very illiquid. The reason that it is illiquid is that people don’t want to purchase such an expensive option. Instead they would prefer to buy some other in-the-money option that also mirrors the stocks general movement (high delta) without having to pay the equivalent of the actual stock’s price. Part of the beauty of options trading is the ability to leverage yourself. People gravitate toward those options in which they can leverage themselves. Such a deep in-the-money option’s purchase price reduces the leverage potential and thus discourages most potential buyers. Their thinking is, "if I’m going to pay that much I might as well buy the stock outright."
Once again, the problem that I see for you is how best to convert your paper profits. As you know, all options have a limited life and will eventually expire. At that time, the option that is worth something (it has intrinsic value) is exercised while the out-of-the-money option is left to expire worthless. So it’s best to start planning now. The key to determining what is the best thing to do is dependent upon your future view of the stock and your personal financial situation. Certain questions need to be answered. Can the stock continue to rise or have you ridden the stock’s upward move for as much as you’re going to get? If not, is there a sizable correction ahead that you would like to avoid? In addition, you have to seriously think about the tax implications?
You haven’t mentioned how long you have held the option and whether it is a LEAP or not. Nevertheless, I talked with Mr. Richard J. Shapiro, a tax expert at Ernst & Young LLP, and he suggested that you seriously look into the tax consequences. The reasons are obvious once I explain them to you.
Let’s look at a few scenarios and see what can happen to you. If you sell your option and take profits on the trade two possible tax consequences could occur. The first concerns whether or not you held the option for more than a year or not. If you did you’ll get cash from the sale and that profit will be taxed at the more favorable long-term capital rate. However, if you held the option less than a year then you will have to pay a big tax on that profit as you won’t be eligible for the more favorable long-term tax rate.
Now consider what happens when you exercise the option and pay for the stock at the original strike price. If you do this then a different tax consequence occurs. According to the tax experts you get no current gain or cash. In addition you get no tax, but instead you start a new holding period on now the "actual stock." The cost of the stock to you is the strike price plus the premium and that is how you will value your stock holding for tax purposes. However, if you should sell the stock next week, next month or anything less than the year holding period then you will have to pay a tax based on the short-term capital gains rate. But, if you like the long-term prospects of the company and can hold the stock for a year you will be eligible for the long-term capital gains rate on hopefully even larger gains.
I hope that helps answer your question on what to do with a very deep in-the-money option. Keep doing what you are doing presently as it is obviously working well and good luck in the future.
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