Chapter 41: Taxes 92S 
Another usage of the put purchase, for tax purposes, might be to avoid a long­
term loss on a stock position. If an investor owns a stock that has declined in price 
and also is about to become a long-term holding, he can buy a put on that stock to 
eliminate the holding period. This avoids having to take a long-term loss. Once the 
put is removed, either by its sale or by its expiring worthless, the stock holding peri­
od would begin all over again and it would be a short-term position. In addition, if 
the investor should decide to exercise the put that he purchased, the result would be 
a short-term loss. The sale basis of the stock upon exercise of the put would be equal 
to the striking price of the put less the amount of premium paid for the put, less all 
commission costs. Furthermore, note that this strategy does not lock in the loss on 
the underlying stock. If the stock rallies, the investor would be able to participate in 
that rally, although he would probably lose all of the premium that he paid for the 
put. Note that both of these long-term strategies can be accomplished via the sale of 
a deeply in-the-money call as well. 
SUMMARY 
This concludes the section of the tax chapter dealing with listed option trades and 
their direct consequences on option strategies. In addition to the basic tax treatment 
for option traders of liquidation, expiring worthless, or assignment or exercise, sev­
eral other useful tax situations have been described. The call buyer should be aware 
of the wash sale rule. The put buyer must be aware of the short sale rules involving 
both put and stock ownership. The call writer should realize the beneficial effects of 
selling an in-the-money call to protect the underlying stock, while waiting for a real­
ization of profit in the following tax year. The put writer may be able to avoid a wash 
sale by utilizing an in-the-money put write, while still retaining profit potential from 
a rally by the underlying stock. 
TAX PLANNING STRATEGIES FOR EQUITY OPTIONS 
DEFERRING A SHORT· TERM CALL GAIN 
The call holder may be interested in either deferring a gain until the following year 
or possibly converting a short-term gain on the call into a long-term gain on the stock. 
It is much easier to do the former than the latter. A holder of a profitable call that is 
due to expire in the following year can take any of three possible actions that might 
let him retain his profit while deferring the gain until the following tax year. One way 
in which to do this would be to buy a put option. Obviously, he would want to buy an