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Old 01-10-2014, 01:28 PM
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Implications of selling puts

When I sell (write) a put, is the collected premium considered normal income, or capital gains?

If I am ultimately assigned the stock, and sell it immediately for a loss, do wash sale provisions negate the value of the loss in capital gains? If so, how long would I have to wait to negate the wash sale rule?



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Old 01-10-2014, 02:43 PM
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Originally Posted by wpkluck View Post


#1;When I sell (write) a put, is the collected premium considered normal income, or capital gains?



#2;If I am ultimately assigned the stock, and sell it immediately for a loss, do wash sale provisions negate the value of the loss in capital gains?



#3;If so, how long would I have to wait to negate the wash sale rule?
#1; I guess it depends. . Put options are like purchased coupons ;they, as investors, buy them to have the option of a particular selling price. If you write puts, you get to keep the option price, or premium, as income, but your final tax obligation depends on whether the buyer exercises her option. When you sell ,write a put option, you give someone the right to sell shares of stock to you at a strike price, usually higher than the current market price. The money you receive from the buyer is known as a premium. The option buyer can exercise the put at any time prior to its expiration date, or on the expiration date only. In either case, you are obligated to purchase the shares at the strike price. This is known as an option call. There are three possible outcomes to a put sale: 1)If the put option you wrote expires, you keep the premium you received as income. You recognize this income in the year that the put expires, and it is taxed as a STCG. You can add this short term gain to any others you have for the year on Sch D of Form 1040. Short term gains are taxed at the same rate as your ordinary income2) If the option is called, that is, the holder chooses to sell you her shares , the option premium is factored in to your total purchase price, or cost basis. You calculate the cost basis by adding the price of the shares to any commissions or fees from the trade and subtracting the option premium. When you sell the shares, you recognize long- or short-term capital gain in the same way you do for any other security: subtract the cost basis, along with fees and commissions related to the sale, from the sale price. If the resulting number is positive, you have a gain. If you held the stock for at least 12 months between purchase and sale, your gain is long-term, and qualifies for a lower tax rate. If not, it is short-term and taxable as ordinary income. If the resulting number is negative, it is a loss, and you can use this loss and any others you have to offset your taxable gains for the year. You need to follow the instructions for Form 1040, Sch D/form 8949, to do this.3) If you want to get out of your put obligation prior to the expiration date, you can offset your option. You do this buy purchasing an equal-valued call option with the same strike price and expiration date. The two options effectively cancel each other out, since you could buy back your own shares. Your gain or loss is the difference between the premium you received for writing the put option and the premium you paid to buy the call. These are short-term gains or losses and are taxable at ordinary income rates.











#2; Wash sale is a term used by the IRS to describe the sale of an investment and immediate repurchase of the same investment. The wash sale rules affect the taxable gains or losses on the stock you sold.The wash sale rule can apply to trades involving stock options. Options present two different types of problems in connection with the wash sale rule. First, if you sell stock at a loss, you can turn that sale into a wash sale by trading in options. And second, losses from the options themselves can be wash sales. You can turn a sale of stock into a wash sale by selling put options. This rule is not automatic. It applies only if the put option is deep in the money — and there's no precise standard as to when a put option is deep enough in the money for the rule to apply. The rule applies if it appears, at the time you sell the put option, that there is no substantial likelihood it will expire unexercised. In this circumstance, selling the put option can be roughly equivalent to buying the stock.for Example: assume that On March 31 you sell 100 shares of XYZ at a loss. On April 10 you sell a put option giving the holder the right to sell to you 100 shares of XYZ at a price substantially higher than the current market price of the stock. The sale on March 31 is a wash sale.



#3;To avoid having the sale of stock classified as a wash sale, you cannot buy the same shares during the period 60 days before or 60 days after the stock shares were sold. If you have sold your stocks shares for a loss and want to use the loss as a tax write-off, you must wait at least 60 days before buying the stock again. If the shares are purchased before the 60 days have passed, the loss will be, I guess partially or entirely , depending on the situation, disallowed as a tax loss.



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