Re: How is option trading handled tax-wise?

From: Rich Carreiro <rlcarr@animato.arlington.ma.us>
Subject: Re: How is option trading handled tax-wise?
Date: Wed, 15 Mar 2000 08:56:57 -0500

Next Article (by Date): Re: Short Sales held between years Rich Carreiro
Articles sorted by: [Date] [Author] [Subject]

>My question now is how are trading options handled come tax time? I
>tried looking for information at the IRS site, but a search came up
>empty and looking over the list of publications didn't seem to help.

It depends :-)

>I've been told that brokers don't include this info on a 1099B form
>and it's up to you to report it.  Is this true,

Yes.

>and if so, how does
>the IRS catch those who are dishonest and don't report anything?

The same way they catch people who are dishonest and lie about
their basis in transactions that are reported.

>Since you usually never own the underlying stock when trading options,
>is there some special procedure that needs to be followed?  Or can
>you just use the same method used in the past - your basis is what
>you paid for the option, and subtract that from the proceeds upon
>sale to determine your gain or loss?

If you don't own the underlying stock and if you don't create
tax straddles (not to be confused with the option trader's meaning
of the word "straddle"), then you treat options just like stock or
any other securities.  You report each sale on Sched D, list acquisition
date, sales date, proceeds, basis, and gain (loss).  An expired option
is treated as having been sold for $0 (if held long) or purchased for
$0 (if held short).

However, if you own the underlying stock and/or create tax straddles,
the rules can get very, very complicated, since options trading can
have results like the stock being treated as if it were sold (constructive
sales), can force you to defer the loss on one side of a complicated
position to another year (anti-straddle rules), etc., etc.

And of course, stuff like the wash sale rule continues to apply.

>Any help or pointer to a site with more info would be great.

IRS Publication 550 talks about some options-related stuff.

www.fairmark.com recommends a book called something like
"Tax Facts, Vol 2" which apparently explains a lot of this
fairly well.

Rich Carreiro                            rlcarr@animato.arlington.ma.us

- -

Next Article (by Date): Re: Short Sales held between years Rich Carreiro
Articles sorted by: [Date] [Author] [Subject]

Go to Jeff Salisbury LWGate Home Page.