40 lines
2.2 KiB
Plaintext
40 lines
2.2 KiB
Plaintext
Chapter 41: Taxes 915
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applicable tax rules pertaining to short sales that any gains or losses from the short
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sale of stock are short-term gains or losses.
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Tax Treatment for the Covered Writer. If, on the other hand, the
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investor was assigned on a covered call - that is, he was operating the covered
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writing strategy and he elects to deliver the stock that he owns against the
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assignment notice, he has a complete stock transaction. The net cost of the stock
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was determined by its purchase price at an earlier date and the net sale proceeds
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are, of course, determined by the assignment in accordance with the preceding
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example.
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Determining the proceeds from the stock purchase and sale is easy, but deter
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mining the tax status of the transaction is not. In order to prevent stockholders from
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using deeply in-the-money calls to protect their stock while letting it become a long
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term item, some complicated tax rules have been passed. They can be summarized
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as follows:
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1. If the equity option was out-of-the-money when first written, it has no effect on
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the holding period of the stock.
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2. If the equity option was too deeply in-the-money when first written and the stock
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was not yet held long-term, then the holding period of the stock is eliminated.
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3. If the equity option was in-the-money, but not too deeply, then the holding peri
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od of the stock is suspended while the call is in place.
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These rules are complicated and merit further explanation. The first rule mere
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ly says that one can write out-of-the-money calls without any problem. If the stock
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later rises and is called away, the sale proceeds for the stock include the option pre
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mium, and the transaction is long-term or short-term depending on the holding peri
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od of the stock.
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Example: Assume that on September 1st of a particular year, an investor buys 100
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XYZ at 35. He holds the stock for a while, and then on July 15th of the following year
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- after the stock has risen to 43 - he sells an October 45 call for 3 points.
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Net call sale proceeds ($300 - $25)
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Net stock proceeds from
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assignment ($4,500 - $75)
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Net stock sale proceeds
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Net stock cost ($3,500 + $75)
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Net long-term gain
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$ 275
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$4,425
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$4,700 $4,700
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$3,575
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+$1, 125 |