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I have sold an option on a stock. Is it taxable this year as income or next year when it expires, or does it reduce the basis of my stock and taxable when I sell the stock?

Submitted: 530 days and 3 hours ago.

Category: Tax

Value: $30

Status: AWAITING CUSTOMER ACTION

Posted by Marvin,EA 530 days and 3 hours ago.

Answer

Hello and thank you for using Just Answer. For regular tax purposes the granting and the exercise of an stock option does not create a taxable event. However, for AMT purposes the exercise of the stock option creates an adjustment. The difference between the exercise price and the fair market value of the stock is the AMT adjustment. In addition to the adjustment in the year of exercise, the basis for regular tax purposes and AMT purposes will be difference. The difference is basis creates still another adjustment at the time of sale. The resulting difference can be a loss for AMT purposes which may be limited to $3,000 per year, causing a capital loss carryover.

Accepted Answer

If you sold a call or a put option (you are the writer) then it is taxable income in the year that it expires. It would be taxable as a short term capital gain. If it was a call option that is exercised prior to the expiration date then you would increase the proceeds from the sale of the stock by the amount of income you received when you sold the option. If it was a put option that is exercised prior to the expiration date then you would decrease your cost basis of buying the stock by the amount of income you received when you sold the option.

Expert:	Bill
Pos. Feedback:	99.6 %
Accepts:	1790
Answered:	10/4/2008

Enrolled Agent

EA, QPA, CHFC, CEBS, CLU - 30 years experience providing financial advice

528 days and 22 hours ago.

Reply

Bill, Thanks for this. To be clear I have sold an option that I expect WILL be exercised. So I will add the option income to the stock proceeds. I see that. But will this option income be considered a long term or short term gain? Thanks for your expertise.

Posted by Bill 528 days and 16 hours ago.

Answer

If you wrote a covered call then the option income will be added to the stock proceeds when the call is exercised and will be treated the same as your holding period for the stock. If you held the stock for more than 1 year then the option income is considered long term capital gain, the same as the gain on the stock. If you held the stock 1 year or less then income and gain will be considered short term.

See page 57 - http://www.irs.gov/pub/irs-pdf/p550.pdf

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Question

I have sold an option on a stock. Is it taxable this year as income or next year when it expires, or does it reduce the basis of my stock and taxable when I sell the stock?

Answer

Accepted Answer

Reply

Bill, Thanks for this. To be clear I have sold an option that I expect WILL be exercised. So I will add the option income to the stock proceeds. I see that. But will this option income be considered a long term or short term gain? Thanks for your expertise.

Answer

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