36 lines
2.3 KiB
Plaintext
36 lines
2.3 KiB
Plaintext
Chapter 41: Taxes 921
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Suppose he does this on July 20th, the day he receives the assignment notice on his
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XYZ July 50 call. The confirmation that he receives from his broker for the sale of
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100 XYZ at 50 - that is, the confirmation for the call assignment - should be marked
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"Versus Purchase July 20th." The year of the sale date should be noted on the con
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firmation as well. This long-term holder of XYZ stock must, of course, pay for the
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additional XYZ bought in the open market for delivery against the assignment notice.
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Thus, it is imperative that such an investor have a reserve of funds that he can fall
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back on if he thinks that he must ever implement this sort of strategy to avoid the tax
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consequences of selling his low-cost-basis stock.
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PUT EXERCISE
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If the put holder does not choose to liquidate the option in the listed market, but
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instead exercises the put - thereby selling stock at the striking price - the net cost of
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the put is subtracted from the net sale proceeds of the underlying stock.
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Example: Assume an XYZ April 45 put was bought for 2 points. XYZ had declined in
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price below 45 by April expiration, and the put holder decides to exercise his in-the
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money put rather than sell it in the option market. The commission on the stock sale
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is $85, so the net sale proceeds for the underlying stock would be:
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Sale of 100 XYZ at 45 strike ($4,500 - $85)
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Net cost of put ($200 + 25)
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Net sale proceeds on stock for tax purposes:
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$4,415
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- 225
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$4,190
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If the stock sale represents a new position - that is, the investor has shorted the
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underlying stock - it will eventually be a short-term gain or loss, according to pres
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ent tax rules governing short sales. If the put holder already owns the underlying
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stock and is using the put exercise as a means of selling that stock, his gain or loss on
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the stock transaction is computed, for tax purposes, by subtracting his original net
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stock cost from the sale proceeds as determined above.
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PUT ASSIGNMENT
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If a written put is assigned, stock is bought at the striking price. The net cost of this
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purchased stock is reduced by the amount of the original put premium received.
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Example: If one initially sold an XYZ July 40 put for 4 points, and it was assigned,
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the net cost of the stock would be determined as follows, assuming a $75 commission
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charge on the stock purchase: |