I trust the collective wisdom and knowledge accumulated here.
I had a question for Tax reporting of options spreads. I think members who use options will find it useful.
Consider the following example:
A Tesla bull spread - Long 95 call Expiry Jan 14
Short 140 call Expiry Jan 14
Both the legs were opened in 2012 at the same day and they expired on the same day in Jan 14 for a profit. So the holding period was over 12 months.
The way TD Ameritrade accounting software – Gainskeeper reports it on 8949 or 1099-B – it treats both legs separately for tax reporting.
The long 95 leg is classified as long term for tax reporting. The short 140 is classified as short term, though it was a part of the same vertical spread.
To me the more logical thing to do so is to identify it as a straddle on form 6781 and treat the cumulative profit as long term since the entire spread was help for a duration of over one year.
If each legs has to be treated separately as the brokerage accounting software does, it would result in a lesser tax liability. But I do not think it is right. I am pretty sure I read it on Motley Fool somewhere that Bull/Bear spreads condors etc…need to be considered together when determining it is long term or short term.
Thoughts ? Will greatly appreciate it.
First, I suggest that you post the question on the Fool public tax board (http://discussion.fool.com/tax-strategies-100155.aspx).
Second, I’d like to note that I do my own taxes, am not an accountant, and have been filing options trades like this for about 7 years now. I’ve never been fully comfortable with the somewhat unclear (IMO) IRS description of the rules for straddles, and so I’ve been reporting all of my spread trades with the legs separate. FWIW, I’ve never knowingly been dinged by the IRS for this. But caveat emptor …
Something of note re options is that, by definition, all short trades are considered short-term gains/losses, whereas a long leg held for more than one year is a long-term gain/loss. Thus, treating them together as one straddle trade would be in conflict with those rules, IMO.
So I’m not saying who’s necessarily correct, only that for me, the Gainskeeper report makes sense, even though it would seem to conflict with many people’s interpretation of the rules regarding straddles.
I’d be curious to hear if you get “expert” advice on this.
as always, i am full of carp
Thanks for the reply and for the link to the Fool Public tax board.
That was part of intent of posting, getting to the right reference material
Last 3 years, I have been filing with legs separate. But I am really getting uncomfortable with it this time. My artificial loss on my short legs wipes out my other short term gains, leaving with me mostly long term gains. I do not think this is right. Though it is in my favor this year, I worry it will go the opposite way some other years.
It is left to interpretation of IRS documentation on straddles. To me it seems offsetting positions on the same underlying property have to be treated as a group.
I will post on the other board too.
Trade legs are always handled independently when reporting U.S. taxes. You are not taxed on the strategy.
I think I need to rephrase the question. The legs can be handled separately but where are they grouped is the key and has implications.
Consider the account has following scenario -
Call Spread Tesla- Tesla Price at expiry 220
a) Long 95 Tesla Call: 12500 Long term
b) Short 130 Tesla Call: -9000 Short term
c) Other Short term Gains: 8000 Short term
- Lump some grouping in form 8949 - (what most brokerages do)
Short Term: - 8000 -9000 = -1000 Tax rate 28% - Tax 280
Long term - 12500 Tax rate 15% - Tax 1875
Total Tax - 2155
- Identify Spread as an offsetting straddle in form 6781 (You just sum up the losses and gains for each identified straddle in Part II)
Call spread : 12500 Long term
-9000 short term
Net: - 3500 Long term
tax - 3500 * 0.15 = 525
Tax on other short term items - 8000*0.28 = 2240
Total Tax - 2240 + 525 = 2765
Clearly in scenario (1) artificial short term losses helps to offset the short term gains leaving a larger long term gain on the books.
I think (2) is more closer to trading intent and should be the correct method (In my view). However most seem to go by (1).
You’ve had some pretty clear (and correct) answers from some pretty experienced options traders and tax payers.
Let me suggest that there are a couple of additional things you should bear in mind:
Although the IRS uses words that we are familiar with, they frequently assign their own specific meanings to them - such as spreads and straddles.
It is unwise to try to use common sense when interpreting the tax code.
Your sort of option spread trades MUST treat the legs separately from a tax point of view (not ‘can’). This treatment will naturally govern whether the legs contribute to your short or long term calculation.
I hope this saves you some time…and helps you avoid over-thinking things
I had a very odd situation once with some kind of paired option trade (spread or maybe risk reversal). It was definitely less than 12 months and it was profitable. Turbo Tax counted part as short term and part as long term, which was surprising. I search the help and the referenced IRS page and it seemed legit and made me worry about past returns. I just searched through some old PDFs of my returns but it did not jump out at me, so I am sorry I can’t be specific, but there can be weird rules and I am not sure all legs are always treated separately. Maybe I imported it from Fidelity instead of manually entering it so Turbo tax knew it was a connected trade?
Maybe it was a risk reversal (synthetic long) where I sold a put and used the money to buy a call. Then the Call was in the money so I made a gain when I closed out. I’ll give that a 60% chance of being the case