Like options-trading strategies, the tax treatment of options trades is far from simple. Under new broker reporting requirements, options transactions are now reported to the Internal Revenue Service when you close the position, including your cost basis and capital gain or loss. Be aware that some options transactions such as straddles, short sales and wash sales require special tax treatment and may result in a reportable capital gain before the position is closed.
The IRS began requiring brokers to keep track of cost basis for security trades beginning in 2011 with equity trades. Options trading was added to the requirement on January 1, 2013. Any option trades after that date will have the basis recorded and reported to the IRS on Form 1099-B when those options are sold, including calculated capital gains on the transaction.
Capital Gains and Losses
With the new reporting requirements, your broker statement and 1099-B will separate short- and long-term capital gains and losses. Any security held for one year or less results in a short-term capital gain or loss. Anything held over a year allows a more favorable long-term capital gains rate, though the loss is treated identically. If after you combine all gains and losses during the tax year, you have a net loss, you can write off up to $3,000 per year against other income and carry over the remainder to future tax years until you exhaust the excess.
Constructive sales are transactions involving an appreciated security such that selling the position would result in a gain if you were to immediately close the position. In-the-money options are one example. Another is when you hold a stock and buy an option to sell at higher than the current market value -- buying that option represents a constructive sale. You must realize the gain on the date of the constructive sale, and the transaction will be reported to the IRS. When you close the position, only report income net of the gain recognized on the constructive sale.
If you sell options purchased before January 1, 2013, the broker may not report the sale to the IRS. However, you are still required to report the transaction when you file your tax return. Report each individual sale of options on Form 8949, using the appropriate part for short- and long-term transactions. Transfer the totals to Schedule D to calculate your net capital gain or loss position for the tax year.
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