General Question

UScitizen's avatar

Accountants: In what year is the income taxable when an option is written in December, and expires in January?

Asked by UScitizen (4273points) November 24th, 2010

For this example, I write a January 2011 put in December 2010. I received the premium in 2010. The option expires in 2011. Regardless of whether it is in, or out, of the money at expiration, I received income in 2010. I believe that income is taxable in 2010 as a short term gain. My friend disagrees with me. Can anyone help us understand the correct answer?

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3 Answers

iamthemob's avatar

Check out IRS Pub. 550 – This seems like the most relevant section – it looks like you have a short term gain but not at receipt:

Writers of puts and calls. If you write (grant) a put or a call, do not include the amount you receive for writing it in your income at the time of receipt. Carry it in a deferred account until:

Your obligation expires,

You buy, in the case of a put, or sell, in the case of a call, the underlying stock when the option is exercised, or

You engage in a closing transaction.

If your obligation expires, the amount you received for writing the call or put is short-term capital gain.

If a put you write is exercised and you buy the underlying stock, decrease your basis in the stock by the amount you received for the put. Your holding period for the stock begins on the date you buy it, not on the date you wrote the put.

If a call you write is exercised and you sell the underlying stock, increase your amount realized on the sale of the stock by the amount you received for the call when figuring your gain or loss. The gain or loss is long term or short term depending on your holding period of the stock.

If you enter into a closing transaction by paying an amount equal to the value of the put or call at the time of the payment, the difference between the amount you pay and the amount you receive for the put or call is a short-term capital gain or loss.

cazzie's avatar

I think @iamthemob has it right. There is usually some discretion, but when the loss or profit is realised, that is the amount that must be declared at the time and date it is realised. There are times when it is differed but it funds are accepted, they must be declared in THAT year.

zenvelo's avatar

yep, @iamthemob has it right. that’s why you see closing transactions in the last week of the year, including a lot of position rolls to establish a loss.

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