26 lines
1.9 KiB
Plaintext
26 lines
1.9 KiB
Plaintext
Taxes
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In this chapter, the basic tax treatment of listed options will be outlined and sev
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eral tax strategies will be presented. The reader should be aware of the fact that tax
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laws change, and therefore should consult tax counsel before actually implementing
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any tax-oriented strategy. The interpretation of certain tax strategies by the Internal
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Revenue Service is subject to reclarification or change, as well.
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An option is a capital asset and any gains or losses are capital gains or losses.
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Differing tax consequences apply, depending on whether the option trade is a
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complete transaction by itself, or whether it becomes part of a stock transaction via
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exercise or assignment. Listed option transactions that are closed out in the options
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market or are allowed to expire worthless are capital transactions. The holding period
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for option transactions to qualify as long-term is always the same as for stocks ( cur
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rently, it's one year). Gains from option purchases could possibly be long-term gains if
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the holding period of the option exceeds the long-term capital gains holding period.
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Gains from the sale of options are short-term capital gains. In addition, the tax
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treatment of futures options and index options and other listed nonequity options
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may differ from that of equity options. We will review these points individually.
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HISTORY
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In the short life of listed option trading. there have been several major changes in the
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tax rules. When options were first listed in 1973, the tax laws treated the gains and
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losses from writing options as ordinary income. That is, the thinking was that only
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professionals or those people in the business actually wrote over-the-counter options,
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and thus their gains and losses represented their ordinary income, or means of mak
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ing a living. This rule presented some interesting strategies involving spreads,
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because the long side of the spread could be treated as long-term gain (if held for
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