The Internal Revenue Service wants to know if your option trading resulted in a capital gain or loss. When you trade put options, you sell the option first with the goal of making a profit when you buy it back at a lower price. With call options, you buy the option first and make a profit when you sell it at more than the buy price.
You report your completed put and call option transactions to determine if you owe capital gains tax. If you report a loss, you can use that amount to offset any capital gains you might have.
Understanding Options Trading
Because option brokerage firms often do not send trade confirmations, you will need the information included on your monthly brokerage statements. Start by making two lists of your trades in chronological order.
Your option trades are either short-term or long-term transactions. Short-term trades are opened and closed in 12 months or less. Long-term trades are held longer than one year. Comparing the dates when you first opened the trade to when you closed it will determine if it is a short-term or long-term trade.
Reporting Tax for Options Trading
You report your option put and call trades on Internal Revenue Service Form 8949, Sales and Other Dispositions of Capital Assets.
Enter the option’s trading symbol in column A, the date you opened the trade in column B, the date you closed the trade in column C and the gross proceeds in column D. Enter the acquisition cost in column E and the commission amount in column G. Subtract the amount in column E from columns D and G and put that amount in column H. Add up the amounts in column H to get your total net short-term and long-term trade proceeds and find your put and call options capital gains tax.
The net proceeds from trading put and call options calculated on Form 8949 is transferred to Schedule D, Capital Gains and Losses. Transfer the short-term net gain or loss to line 1, 2 or 3 and carry the total down to line 7. Transfer the long term net gain or loss to line 8b, 9 or 10 and carry that total down to line 15. The final step is to add up the amounts on lines 7 and 15 and show the total on line 16. The final amount is transferred to your personal tax return.
State Stock Options Tax Consequences
If you live in a state that has capital gains tax, you must file a state return to report your option put and call trades. You must disclose the net transaction proceeds and pay state tax on any resulting liability. If you itemize your federal deductions, you can deduct the amount of state capital gains tax you paid on Schedule A to help lower your federal tax bill.
Tax Law Updates
As of 2018, ordinary income tax rates are generally lower across the board than in previous years. This can mean lower taxes on short term capital gains and less of a tax advantage for holding on to securities long enough to claim the long term gains rate on them.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.