Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe) -- Ignore unavailable to you. Want to Upgrade?

To: zebraspot who wrote (824)	4/30/1998 12:14:00 AM
From: ----------	Read Replies (1) \| Respond to of 2241

The rules are sort of weird depending on the transaction. Here is a "cut & paste" of page 42 from IRS publication 550 "Gains & losses on investment securities." The wash rule applies to the sale & purchase of "like securities". A long time ago when interest rates actually went up, it used to be common practice to sell a muni bond for the tax loss & replace it with a different issuer, a slightly different maturity & different coupon. Those were not "like securities" per the then applicable IRS regulations. (Although they behaved extremely similar.) I am NOT a qualified tax accountant, and would not venture a qualified interpretation of the regs. IMO, what you understand is correct. If you change strike price AND month, that would be a different security. However, please check with an accountant before you tell the IRS "Doug said it was ok." <bg> 1) The amount of gain you would have had Table 4-1. Puts and Calls on an open position if you had sold it on Puts the last business day of the tax year at its fair market value, and When a put: If you are the holder: If you are the writer: 2) The amount of gain realized on a position if, as of the end of the tax year, gain has Is exercised Reduce your amount realized Reduce your basis in the stock been realized, but not recognized. from sale of the underlying you buy by the premium you re-stock by the cost of the put. ceived for the put. Example. On July 1, 1996, you entered Expires Report the cost of the put as a Report the premium you re- into a straddle. On December 16, 1996, you capital loss.* ceived as a short-term capital closed one position of the straddle at a loss of gain. $15,000. On December 31, 1996, the end of your tax year, you have an unrecognized gain of $12,750 in the offsetting open position. On Is sold by the holder Report the difference between This does not affect you. (But if the cost of the put and the you buy back the put, report the your 1996 return, you are limited to a loss of amount you receive for it as a difference between the amount $2,250, which is the amount of the loss minus capital gain or loss.* you pay and the premium you the unrecognized gain in the open position. received for the put as a short- You must carry forward to 1997 the unused term capital gain or loss.) loss of $12,750. Exceptions Calls The loss deferral rules described in this sec- When a call: If you are the holder: If you are the writer: tion do not apply to: 1) A straddle that is an identified straddle Is exercised Add the cost of the call to your Increase your amount realized at the end of the tax year, basis in the stock purchased. on sale of the stock by the pre-mium you received for the call. 2) Certain straddles consisting of qualified covered call options and the stock to be Expires Report the cost of the call as a Report the premium you re- purchased under the options, capital loss on the date it ex- ceived as a short-term capital 3) Hedging transactions, described earlier pires.* gain. under Section 1256 Contracts Marked to Market, and Is sold by the holder Report the difference between This does not affect you. (But if 4) Straddles consisting entirely of section the cost of the call and the you buy back the call, report the 1256 contracts, as described earlier amount you receive for it as a difference between the amount under Section 1256 Contracts. capital gain or loss.* you pay and the premium you received for the call as a short-term capital gain or loss.) Identified straddle. An identified straddle is not subject to the loss deferral rules. Losses *See Holders of calls and puts and Writers of calls and puts in the accompanying text to find whether your gain from positions in an identified straddle are de- or loss is short term or long term. ferred until you dispose of all the positions in the straddle. Any straddle (including a straddle consist- dispose of or otherwise terminate the position commodities traders. See section 1258(d)(5) ing entirely of section 1256 contracts) is an of the Internal Revenue Code. in a transaction in which you recognize gain or identified straddle if all of the following condi- loss, you must recognize the built-in loss. The tions exist: conversion transaction rules do not affect How to report. See the instructions for lines 1) You clearly identified the straddle on your whether the built-in loss is treated as an ordi- 11 and 13 of Form 6781, Gains and Losses records before the close of the day on nary or capital loss. From Section 1256 Contracts and Straddles, which you acquired it, for details on how to report any gain from the disposition or other termination of any position 2) All of the original positions that you iden- Netting rule for certain conversion trans-you held as part of a conversion transaction. tify were acquired on the same day, actions. Before determining the amount of gain treated as ordinary income, you can net 3) All of the positions included in item (2), certain gains and losses from positions of the above, were disposed of on the same day Straddles same conversion transaction. To do this, you during the tax year, or none of the posi- This section discusses the loss deferral rules have to dispose of all the positions within a tions were disposed of by the end of the that apply to the sale or other disposition of 14-day period that is within a single tax year. tax year, and positions in a straddle. These rules do not ap- You cannot net built-in loss against gain. 4) The straddle is not part of a larger ply to the straddles described under Excep- You can net gains and losses only if you straddle. tions, later. identify the conversion transaction as an iden-For information on what is meant by a tified netting transaction on your books and ``straddle'' and a ``position'' in a straddle, see records. Each position of the conversion Qualified covered call options and op- Definition of a Straddle, later. transaction must be identified before the end tioned stock. A straddle is not subject to the of the day on which the position becomes part loss deferral rules for straddles if: of the conversion transaction. For conversion Loss deferral rules. Generally, you can de- 1) All of the offsetting positions consist of transactions entered into before February 20, duct a loss on the disposition of one or more one or more qualified covered call options 1996, this requirement is met if the identifica- positions only to the extent that the loss ex- and the stock to be purchased from you tion was made by that date. ceeds any unrecognized gain you have on off- under the options, and setting positions. Unused losses are treated as sustained in the next tax year. Options dealers and commodities traders. 2) The straddle is not part of a larger Special rules apply to options dealers and Unrecognized gain.