32 lines
2.0 KiB
Plaintext
32 lines
2.0 KiB
Plaintext
Chapter 41: Taxes 913
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500 calls for $1,500 and sold them 6 weeks later for $3,500. Second, he bought an
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OEX January 160 call for 3.25 seven months ago and still holds it. It currently is trad
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ing at 11.50. Finally, he sold 5 SPX February 250 puts for 1.50 three days ago. They
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are currently trading at 2. The net gain from these transactions should be computed
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without regard to holding period.
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Nonequity Original Current Gain/
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Contract Price Price Cost Proceeds Loss
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S&P calls $1,500 $3,500 +$2,000 realized
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OEX January 160 3.25 11.50 $ 325 $1,150 + 825 unrealized
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SPX February 250 1.50 2.00 $1,000 $ 750 250 unrealized
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Total caeital gains +$2,575
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The total taxable amount is $2,575, regardless of holding period and regardless of
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whether the item is realized or unrealized. Of this total taxable amount, 60% ($1,545)
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is subject to long-term treatment and 40% ($1,030) is subject to short-term treat
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ment.
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In practice, one computes these figures on a separate form (Section 1256) and
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merely enters the two final figures - $1,545 and $1,030- on the tax schedule for cap
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ital gains and losses. Note that if one loses money in nonequity options, he actually
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has a tax disadvantage in comparison to equity options, because he must take some
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of his loss as a long-term loss, while the equity option trader can take all of his loss as
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short-term.
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EXERCISE AND ASSIGNMENT
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Except for a specified situation that we will discuss later, exercise and assignment do
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not have any tax effect for nonequity options because everything is marked to mar
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ket at the end of the year. However, since equity options are subject to holding peri
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od considerations, the following discussion pertains to them.
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CALL EXERCISE
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An equity call holder who has an in-the-money call might decide to exercise the call
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rather than sell it in the options market. If he does this, there are no tax consequences
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on the option trade itself. Rather, the cost of the stock is increased by the net cost of
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the original call option. Moreover, the holding period begins on the day the stock is |