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Options Taxation

In General

 

Although many say that trading options is very risky, it is actually very conservative, if done properly and can hedge your portfolio from significant losses.  There are a host of trading strategies.  You should choose one that you understand, that works for you and with which you are comfortable.

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Tax Reporting

 

You're familiar with gains and losses but are you familiar with the term "wash sale"?  Do you know how to handle an assigned short put or exercised long call?  If not, then you need to be if you trade options on a daily/weekly/monthly basis.  You need to capture all this information for two basic reasons:  (1) to determine your investment performance, and (2) to report it to the IRS on your tax return.  If you only have a few trades you can probably determine both with a self-developed spreadsheet.  But if there are many trades, with wash sales, stock splits, reverse splits and spin-offs ... well, it can get pretty difficult, even for a CPA.

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Another large complication stems from the trading of publicly traded partnerships (PTPs).  The reporting for PTPs is very complicated and confusing and can easily cause you to understate or overstate your tax liability because of the many tax forms the trading of PTPs involves.

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There is software that can be purchased online to help you.  However, a few questions will obviously arise:

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  • Do I know how to get the correct information into the software?

  • What do I do with the output?  How do I put it on my tax return?

  • Is it correct?  What do I tie the amounts to?

  • When do I report December option sales?

  • What about the closing of positions in January?

  • What if I am audited, will the software vendor help me?

OptionsTaxGuy

I developed this website to deal with the questions raised above as well as:

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  • Trader vs Investor tax status

  • Mark-to-market elections

  • Trading entity selection

  • Option strategy tax ramifications

  • Tax compliance - Form 8949, Schedule C/D, Form 4797, Form 6781

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I enjoy trading options and am a serious student of it.  I also found that the online tax compliance/reporting software was inadequate for my standards.  Therefore, I developed my own.  Samples of that output can be found at www.optionstaxguy.com.

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I hope to see you there!

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