Xia:
Options & the federal income tax considerations (Xia, I know you didn't request this but in case you or others are interested, also it will help put you to sleep).
The questions was asked if your brokerage is required to report proceeds on options. In a nut shell the answer is yes. It is then the individuals responsibility to match the proceeds with the underlying security.
Options:
Gain or loss from the sale or exchange of a noncompensatory option (or privilege, e.g., a warrant) to buy or sell property is considered a gain or loss from the sale or exchange of a capital asset if the optional property is (or would be if acquired) a capital asset in the taxpayer's hands. (Code Sec. 1234(a)(1);Reg 1.1234-1(a) ) I-6504 ; 12,344 ; 25,202 If the holder of an option incurs a loss because he fails to exercise the option, the option is considered to have been sold or exchanged on the date it expires. (Code Sec. 1234(a)(2); Reg 1.1234-1(b) ) I-6510 ; 12,344 ; 25,203
"Put" and "call" options; straddles.
There are no tax consequences to the buyer or writer of an option until the option is exercised, otherwise closed out or lapses. [see new law change below] The holder treats the premium paid as a nondeductible capital expenditure at the time of payment. The premium isn't included in income of the writer at the time of receipt. I-6521, I-6522 ; 12,344.03 ; 25,201 The premium received by the writer for granting a "put" or "call" option that's not exercised ("lapses"), so that the writer simply keeps the money, is generally treated as ordinary income, and gain or loss to the writer on repurchase of an option ("closing transaction") is also generally ordinary. (Reg 1.1234-1(b) ) However, gain or loss to a nondealer from a lapse or closing transaction involving options in stocks, securities, commodities or commodity futures is treated as short-term capital gain or loss. (Code Sec. 1234(b);Reg 1.1234-3 ) I-6515 ; 12,344 ; 25,206
Where a put is exercised, the premium received by the writer for granting the option is deducted from the option price for the property in determining the net basis to the writer of the property purchased. The holder deducts the premium from the amount received from the writer, in computing the gain or loss realized on the sale. Where a call is exercised, the premium received by the writer (i.e., seller) for granting the option is added to the sale proceeds received. This is included in the holder's (buyer's) basis for the property. I-6530, I-6531 ; 12,344.04 ; 25,208
When the put or call is bought from the original holder (or his assignee), the buyer is treated as a holder, and the amount paid by him to the original holder is likewise treated as a premium. However, the original holder is not treated as a writer, and must include that premium in his amount realized upon disposition of the option, see 2612. I-6523 ; 12,344.03, 12,344.04
[if a holder (other than a dealer) of a put or call option on publicly traded stock closes out a position by selling the option on an exchange, the gain or loss is a capital gain or loss. ]
A "straddle" option combines a put and a call. For example, the writer agrees to buy a stated number of shares of stock within a definite period at a specified price (a put) and simultaneously agrees to sell a like number of shares of the same stock, at the same price, within the same time (a call). For this, the buyer of the straddle pays the writer a premium. The writer must allocate a single premium received between the put and the call options on the basis of their relative market values at the time the straddle is issued or on any other reasonable and consistently applied basis. (Reg 1.1234-3(e)) I-6528 ; 12,344.06
The NEW LAW no longer allows gains of marketable securities to be deferred by short selling. They term this sale as a "constructive sale" of an appreciated position which occurs when the taxpayer enters into a short sale of the same or substantially identical property. In general, an appreciated financial position is defined as any position with repsect to any stock, debt intrument,etc. if there would be a gain if the position were sold, assigned, or otherwise terminated at fair market value.
There are some exceptions:
1. Constructive sale is closed before the end of the 30th day after the close of the tax year in whcih it was entered,
2. The taxpayer holds the appreciated position throughout the 60 day period beginning on the date the transaction is closed, and
3. At no time during the 60 day period is the taxpayer's risk of loss reduced with repsect to the position.
Please don't ask me how congress expects anyone to track all this. Just provides a great opportunity for software writers and tax consultants.
Have a good night.
Tim |
