Comments on: How Stock Options Are Taxed

By: Tax Guy

Tax Guy — Thu, 09 Dec 2010 16:53:47 +0000

Writing a put means you are assuming an obligation to buy the underlying security in return for a premium.

You have said you normally trade on the capital account.

The premium received is a capital gain at the time the option is written.

If you acquire another option to close out the position, this is a capital loss.

By: Shin

Shin — Wed, 08 Dec 2010 18:28:06 +0000

Thank you for your reply, let me clear my question,
I am writing the put to gain the premium ($100) on 2010, the expiry date is on May 2011. Let’s say today is Feb 2011, i want to close the position, therefore i need to pay the premium back to complete this trade, correct? IF the amount i am paying is $25, should this consider as my Cap lost on 2011? Or this is amend 2010 tax return ?
Thank you again

By: Tax Guy

Tax Guy — Wed, 08 Dec 2010 18:08:11 +0000

I’m confused by your statements. On the one hand you say you are receiving the premium (which suggests you are writing the put) on the other you are paying out. Also, the concepts are a little confusing because the term “shorting” means to sell stock you don’t own.

Using the property terminology, please advise whether you are buying a put or writing a put.

The buyer of a put has the “right” to sell a security. The writer has an “obligation” to buy a security and receives the premium.

By: Shin

Shin — Tue, 07 Dec 2010 14:13:59 +0000

Hi Tax Guy,

These are similar questions as Marin but I am asking about short put. For example, I short put a stock XYZ this year, I gain premium $100 and assume the premium is considered a capital gain in 2010. Here are my questions,
1) I close the position in year 2011 and pay $25,
2) I close the position in year 2011 and pay $200,
Should I consider capital loss $25 and $200 in year 2011 respectively? Or should I amend 2010 tax return for both cases?
Thank you

By: Tax Guy

Tax Guy — Mon, 05 Apr 2010 16:19:05 +0000

JL:
I would be inclined to report your gross gains as income on 121 and your gross losses on 221 and attach a letter to your return outlining how you have filed.

I would suggest that you should probably hire someone to do your taxes. You will have a reasonable assurance it was done correctly and you will have recourse if not.

The information in this site is general information only and should not be considered tax advice.

By: JL

JL — Sun, 04 Apr 2010 16:41:39 +0000

I normally treat my gains and losses as capital gains, but this year I wrote and bought back some naked puts as well. I sometimes made a profit, and sometimes made a loss, but eventually ended up with a total income loss (considering only those naked puts). How should this information be entered within Schedule 4?

Some choices :
a) report the total income loss as a “negative other investment income” (line 121);
b) report the total income loss as a deduction (line 221);
c) report separately all the income gains on line 121 and all the income losses on line 221;
d) other?

What do you think? Thanks for any pointers…

By: Tax Guy

Tax Guy — Tue, 16 Feb 2010 01:07:28 +0000

I have not had to complete forms for options trading on the income account. However, if you normally treat your gains and losses as capital gains and losses but have options that require you to report your gains as income, you can report them as other income on Schedule 4. If you are considered in the business of trading then you can use the Business income form (T2124).

By: Marin

Marin — Mon, 15 Feb 2010 15:59:50 +0000

Clear and concise.
Considering you are treating all premiums received as Income,
I found out that you should use form 2125.
What Part should I use to include that income, Part 1, business Income, Part 2, Professional Income? If for the year in question there is a net loss, what Part should we use to deduct income given the net loss from option writing.
Thanks in advance tax guy.

By: Tax Guy

Tax Guy — Mon, 01 Feb 2010 01:28:49 +0000

@J – Assuming you normally trade on the capital account, the premium received in 2009 would be a capital gain. You would only amend your 2009 return if the option were exercised in 2010. If you acquire an offsetting option in 2010, the cost would be a capital loss in 2010.

By: J

Sat, 30 Jan 2010 01:21:11 +0000

Suppose I sell a covered call option in 2009 and buy to close in 2010. I assume the premium is considered a capital gain in 2009. But is the price paid to close the position a capital loss for 2010, or would I need to amend my 2009 tax return to reduce 2009 capital gains?