Andrew,
I see a couple of problems with what you have stated.
If I had allowed myself to be called out and delivered the shares from my long position in AMAT, I would have faced substantial capital gains liability. To avoid this liability -- and assuming for the moment a desire to maintain the underlying long position -- I could have bought AMAT at the close, and at tax time designated the new shares as the shares that were delivered under the options contract.
My question is, is there a third alternative when delivering the shares: I.E. could I have instructed my broker to establish a short position for me in AMAT, and to deliver the shares from the short position. That would have left me on Monday morning with my original long position in AMAT, plus a short position for the number of shares delivered as a seller of the calls. i.e. shorting against the box. I could then have closed the short position in a few days when the share price had drifted back down.
I added the bold to call attention to a few things. I am not a tax professional, but I've been paying attention to what they say and reading things on my own. You should certainly consult one before accepting what I say, but here goes:
The IRS has gone out of its way to close the loopholes that allowed people to "avoid tax liability". Specifically, you do not get to wait until tax time to designate the shares you sold. Unless you designated them at the time of the sale, and have acceptable documentation from your broker identifying the shares you sold at the time of the sale, you are required to use first in- first out (FIFO) accounting. Furthermore, shorting against the box is no longer permitted by the IRS to avoid (or postpone) tax. For tax purposes, shorting against the box is treated as if you you had sold your long position. When you cover the short, you are considered to have taken a new position.
The only thing you could have done would have been to buy shares before expiration, and direct you broker to cover the assignment using the new shares ahead of time. A full service broker would almost surely do that for you, and provide the needed documentation. Many online brokers can't be bothered to do that sort of thing.
Dan |
