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