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Strategies & Market Trends : The Options Box -- Ignore unavailable to you. Want to Upgrade?

To: Joey Smith who wrote (10421)	4/13/2001 12:02:05 PM
From: hobo	Read Replies (2) \| Respond to of 10876

I sold puts in 2000 & then excercised the puts & bought the underlying stock. I currently still own the stock. Is there any tax consequence for 2000? I'm assuming that the premium I received in 2000 reduces my cost basis for the stock, & the only tax consequence is when I sell the stock. I dont have to report the put premium as income in 2000, do I? Great question. I am not a tax accountant or attorney, therefore, not qualified to give advice, and you should read this note under such light. However, as my own tax counsel has advised me: Each transaction is a different one, and each has its own basis. i.e. You buy (or sell) an option, whatever premium you paid (or received) is your basis. Such transaction is one part of two, the opening is the buy (or sell), and the closing would be the sell (or covering) being the second part. In this case, the premium received is the first leg of an independent transaction. The second part of the transaction can be: 1. you "buy to cover", hence you will either have a profit or a loss --depending on premium received and then premium paid for when you "covered". 2. option expires worthless. This means your premium is 100 % profit (minus commissions). 3. option is "put on" you, (exercised), which means you bought the stock, (as in your case). Then, the "closing" cost for your option is ZERO, i.e. premium is 100% profit minus commissions. Now, the purchase of the stock is a separate transaction which means your purchase price (minus commission), is your basis. This is how I have been treating my own transactions. My tax man knows it and has not expressed any opinion to the contrary. I do not know if one has the "choice" to treat it the way you described it. My assumption would be: "NO" since the option itself is a contract that terminates, as explained above, by buying it back, worthless expiration, or exercise of its terms. Based on that, I can not see what argument one would have to "connect" it to the basis of the acquired stock. Now, it is important to also understand that premium received, falls under "Short term capital gain" NOT ordinary income. This is an important difference, since the tax rates are different for capital gains as opposed to ordinary income. Having said that, there is also a difference between SHORT term and LONG term in said capital gains. I am not sure of the exact number. Indeed, now that I am writing this, I am remembering that it is possible that the tax rate applied to short term capital gain MAY be the same as ordinary income --I DO NOT REMEMBER THAT-- please verify. I am NOT saying that this opinion is the LAW, I am simply saying this is my assumption and how I have been treating my own transactions. If you find a qualified opinion that would be applicable and support your case, please let me know as it seems, on a long term investment basis, that it is better to delay payment of any tax in most cases. (at least this is how I would view it.) Finally, depending if you trade often, you may consider yourself to be a "trader" rather than an "investor". The reporting forms are different and there may be certain advantages between the two, this of course will depend on each individual case. It would pay you to spend the money on good tax counsel. Let me know if you find out. Here is a site that may give you an answer: schaeffersresearch.com you can also direct your own question to them in case you do not find the answer.

To: Joey Smith who wrote (10421)	4/15/2001 11:46:48 PM
From: zyx1996	Respond to of 10876

I think you are right. The transaction is not finished until you sell the stock. ZG

To: Joey Smith who wrote (10421)	4/16/2001 7:32:17 PM
From: shortilong	Respond to of 10876

Joey, when you sell a put , and it is exercised and the stock is put to you, the premium you received then becomes part of the cost basis of the stock you bought. If and when you sell the stock , is the time you would pay on the gain from the puts. Until then, the premium is yours tax free to do with what you wish. Example : i sold $10 puts on Novell for $2 each, then got put the shares. When i sold the shares, my cost basis was $8 (10-2) Also, get yourself a copy of IRS Publication #550, which lays it all out in the section entitled "Writers of Puts and Calls" Good luck to you S Long