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training_data/curated/text/31de947159f9c8e689b3b55d8bc8aec9153925fab9f2ee5216e2703a6cf7e3cb.txt

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+Chapter 41: Taxes 929 
+Example: An investor has written an uncovered XYZ January 50 call for 5 points and 
+the call has dropped in value to 1 point in early December. He might want to take 
+the 4-point gain, but would prefer to defer realization of the gain until the following 
+tax year. Since the call write is at a profit, the stock must have dropped and is prob­
+ably selling around 45 in early December. Buying the underlying stock would not 
+accomplish his purpose, because if the stock continued to decline through year-end, 
+he could lose a substantial amount on the stock purchase and could make only 1 more 
+point on the call write. Similarly, a call purchase would not work well. A call with a 
+lower striking price - for example, the XYZ January 45 or the January 40- could lose 
+substantial value if the underlying stock continued to drop in price. An out-of-the­
+money call - the XYZ January 60 - is also unacceptable, because if the underlying 
+stock rallied to the high 50's, the writer would lose money both on his January 50 call 
+write and on his January 60 call purchase at expiration. Writing a put option would 
+not "lock in" the profit either. If the underlying stock continued to decline, the loss­
+es on the put write would certainly exceed the remaining profit potential of 1 point 
+in the January 50 call. Alternatively, if the stock rose, the losses on the January 50 call 
+could offset the limited profit potential provided by a put write. Thus, there is no rel­
+atively safe way for an uncovered call writer to attempt to "lock in" an unrealized gain 
+for the purpose of deferring it to the following tax year. The put writer seeking to 
+defer his gains faces similar problems. 
+UNEQUAL TAX TREATMENT ON SPREADS 
+There are two types of spreads in which the long side may receive different tax treat­
+ment than the short side. One is the normal equity option spread that is held for more 
+than one year. The other is any spread between futures, futures options, or cash­
+based options and equity options. 
+With equity options, if one has a spread in place for more than one year and if 
+the movement of the underlying stock is favorable, one could conceivably have a 
+long-term gain on the long side and a short-term loss on the short side of the spread. 
+Example: An investor establishes an XYZ bullish call spread in options that have 15 
+months of life remaining: In October of one year, he buys the January 70 LEAPS call 
+expiring just over a year in the future. At the same time, he sells the January 80 
+LEAPS call, again expiring just over a year hence. Suppose he pays 13 for the January 
+70 call and receives 7 for the January 80 call. In December of the following year, he 
+decides to remove the spread, after he has held it for more than one year - specifi­
+cally, for 14 months in this case. XYZ has advanced by that time, and the spread is 
+worth 9. With XYZ at 90, the January 70 call is trading at 20 and the January 80 call 
+is trading at 11. The capital gain and loss results for tax purposes are summarized in 
+the following table (commissions are omitted from this example):