You can count on your broker sending both you and the Internal Revenue Service copies of Form 1099-B, or a substitute form. These forms will contain details of each option trade you make: the option identification, its purchase cost, sales proceeds, short-term vs. long-term capital gain or loss, and wash sales. However, that’s just the start. You have to file Form 8949 reporting each gain or loss, and Schedule D showing your totals.
A call option contract gives the buyer the right to purchase an underlying asset, such as 100 shares of stock, for a set price -- the strike price -- on or before the expiration date. The call seller collects a premium upfront -- this is the cost basis -- and she must deliver the asset to the buyer upon option exercise. A put option gives the buyer the right to sell the asset at the strike price. The put seller must accept and pay for the asset when the buyer exercises the put. You don’t report the gain or loss on an option trade until you complete it in one of three ways: expiration, offset or exercise.
Gains and Losses
Options generate short-term capital gains and losses. However, you might be able to record a long-term gain or loss if you receive the underlying asset through option exercise. You pay your marginal tax rate on short-term capital gains, but you pay special lower rates on long-term gains. Losses reduce gains. If losses exceed gains, you can offset up to $3,000 of that year's ordinary income and then carry forward any additional amount of loss to future years.
If an option loses all of its value, the buyer simply lets it expire. The buyer reports a short-term capital loss equal to the premium plus commissions. The seller reports a capital gain on the premium minus the commission cost. You report the gain or loss as of the expiration date.
You can escape an option position through a process called offset. If you are the option buyer, or long position, you sell an identical option. The two options cancel each other. Calculate your gain or loss on the premium you paid to buy the option, minus the premium you received to sell its twin. If you opened a short option position by initially selling the put or call, you offset it by buying the identical contract. You report your gain or loss as of the offset date. You cannot offset an exercised option.
The call buyer may choose to exercise a call option by paying the strike price and receiving the underlying asset. The buyer adds the call premium to the asset’s strike price to determine the position basis. The buyer doesn’t record a capital gain or loss until selling the underlying asset. The capital gain or loss is long-term if the buyer holds on to the underlying asset for a more than a year. The seller’s gain or loss is the difference between the asset purchase price and the strike price, plus the premium income, as of of the exercise date.
A put buyer who exercises the option must deliver the underlying asset to the put seller in return for the strike price. The buyer reports the net gain or loss on the asset, minus the put premium as the capital gain or loss realized on the exercise date. The put seller doesn’t report the capital gain or loss until selling the underlying asset. The seller figures the gain or loss on the asset plus the premium income. If the put seller holds the underlying asset for more than a year, the capital gain or loss is long-term.
According to the wash sale rule, if you open a new option position through repurchase or resale of an option position that you closed out within the previous 30 days, you cannot claim a loss on the earlier position.
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