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To: ChanceIs who wrote (40990)	3/29/2005 2:01:16 PM
From: kodiak_bull	Read Replies (1) \| Respond to of 206325

Chancels, I don't think it should make a difference whether you are long a call or long a put; in either case you have bought an instrument that may be held (for investment) for over one year, therefore it should be a capital asset. Here is a somewhat dated and inconclusive article, but it's headed in the right direction: "Another advantage to LEAPs is their tax treatment. LEAPs generally offer two expiration dates, with the current contracts lapsing in January, 2003, and January, 2004. (The first group of 2005 LEAPs is expected to appear in May, 2002.) Unlike short-term options, LEAPs held for a year and a day or longer should qualify for the lower capital-gains tax rate reserved for long-term investments, says Bill Ryan, manager of the Options Industry Council Call Center, which serves brokers and individual investors. However, if instead of selling your options you exercise them, you must hold onto the stock for another year before it can qualify for long-term capital gains tax treatment, Ryan adds. Since the rules can be complex, consult a tax expert." businessweek.com Here is a fuller summary that reaches the same conclusions (note the IRS reference at the end): This article summarizes the rules for reporting gains and losses from trading stock options. Like any other security transaction, even if you get cash up front as in the case of shorting a stock or writing an option, you do not declare a profit or loss until the transaction has been closed out. Also note that ordinary options expire in 6 months or less, so most gains or losses are short-term (but see below for an exception in the case of writing covered calls). However, LEAPS can have a lifetime of over 2 years (also see the article elsewhere in this FAQ), so gains or losses might be long-term for the purpose of the tax code. Buyers of Options There are three different tax treatments that could occur when you decide to buy a put or call option. The first is that you reverse your position (sell the option) before the exercise date. If this is the case, then you will have either a short-term (if held for under 1 year) or long-term (if held for more than 1 year) capital gain/loss to report. The second tax treatment occurs if you allow the option to expire unexercised. It would then be treated as either a short-term or long-term loss based on the holding period of the option at the expiration date. The third tax treatment for buying options occurs when you decide to exercise either your put or call option. If you exercise your call (the right to buy stock) you add the cost of the call to the cost basis of your stock. If you exercise a put (the right to sell stock) then the cost of the put reduces your total amount realized when figuring gain or loss on the sale of that stock. Sellers of Options There are also three tax treatments that could occur when you sell a put or call option. The first possibility is that you reverse your position on an option that you wrote. Then it would become either be a short-term gain or loss. The difference between what you sold it and bought it back at will determine the gain/loss status. The second possibility is that the option expires (it is not exercised before the expiration date). In this scenario you would report the premium received as a short-term capital gain in the year the option expires. The third situation is when the option is exercised (you are called or put). In the case of a call, you add the premium to the sale proceeds of the stock to determine a gain or loss on the sale of the stock. The holding period of the stock (not the option!) will determine if the gain is short term or long term. So if it was a covered call, it might be short or long term. If it was a naked call, the holding period will be brief (minutes?) and so it's a short-term gain. In the case of a put that is exercised, the tax situation is significantly more complex as compared to a call. To determine if the premuim counts as income when the put is exercised or if it just lowers the cost basis of the stock is determined by many factors, just one of which is whether the put was in the money or out of the money when it was written, and to what extent. Novice put writers should consult with a professional tax advisor for assistance. For the last word on the tax implications of trading options, get IRS Publication 550, _Investment Income and Expenses_. invest-faq.com

To: ChanceIs who wrote (40990)	3/29/2005 2:06:58 PM
From: kodiak_bull	Respond to of 206325

Page 8 of this pdf confirms that a long put position can give rise to either short term or long term capital gains treatment See "Long Puts": cboe.com Kb

To: ChanceIs who wrote (40990)	3/30/2005 1:47:06 AM
From: energyplay	Respond to of 206325

IRS rules are odd, but careful study, sometimes they can be used to your advantage. There are some ways managing big options gains IF the underlying is going to stay put after a large move. For calls, obviously, you can exercise them, then the waiting period begins. If you have a very large gain, this can have a nice effect on your margin account. For puts, you can exercise them to short, which does not produce income until you cover or the stock is "worthless". This can also have positive effect on margin accounts. If the stock is under 2/3 of the strike price, this can free up money for other investments. You might have use for the money for a few years (or decades if you shorted some tech stocks) Buying bond funds or royalty trusts can produce some nice income. ****** There is also some differences in the settling dates for tax purposes between puts and calls.