Selling options and taxes

[utrecht]

I have recently sold some long term index puts to take advantage of the ridiculous premiums due to the VIX being at all time highs. The puts dont expire until different points in 2009.

Anyone know how I handle this for tax purposes? Lets say I sold some puts this week and brought in $10K in premium, but the option doesnt expire until Mar '09. Can I report the $10K as income this year and deduct it from my losses I took with my recent tax loss harvesting? Or do I have to wait until I close the trade out since I dont really know what my profit or loss is until then even though I received the money now?

 

[dex]

If you use the cash basis for your taxes; you have to have a transaction until you recognize a profit or loss

 

[utrecht]

If you use the cash basis for your taxes; you have to have a transaction until you recognize a profit or loss

Could you please re-read what you wrote and see if thats what you meant? I read it 5 times and cant make sense of it. I think it means I have to wait until the trade is closed to claim anything, but the way you worded it confuses me.

 

[clifp]

Dex's comment is correct, taxes are not recognized until you finish the transaction.
Here are some real life examples.

I routinely write covered call leaps. I do not recognize any income, unless I cover my position that year or the next year when either the option expires or it is exercised. So this year I'll take a short-term capital gain on the Jan 2008 calls which I wrote in 2007.

I also wrote puts in 2007 on some banks stocks which got exercised in 2008. For the banks stocks I sold (BAC), I'll subtract the premium I received from the put option from the basis for the stock. So I got $2 for a Jan 08 $40 put. I recently got $1.50 for Dec 2007 27.50 BAC call. If the call gets exercised; my basis for BAC will be $40 - $2 - 1.50 = $36.50 I'll receive 27.50 and take a $9 (plus commissions) loss on BAC. If wrote a Jan 2009 call I would report no taxes in 2008 on my BAC stock and options.

I will probably keep my BB&T stock since I have a profit on it, the put premium I got back in 2007 will reduce my basis (e.g. increase capital gains owed) until I sell the stock.

 

[dex]

You have to wait until the trade is closed or you sell the option in the open market. Right now it is like you own a stock - you don't recognize the profit or loss until you sell the stock.