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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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Hello, I am interested in starting options trading, but have

Resolved Question:

Hello, I am interested in starting options trading, but have a concern about the tax implications of doing so.

Hypothetically, let's say that I have a string of successful options trades (leaving out fees for simplicity's sake); I spend $1,000 to make $2,500, then re-invest that $1,500 profit to to make $4,000, then re-invest that $2,500 profit to make $5,000 profit, then I stop options trading for that tax year.

In this situation, since I had a total of $11,500 in short-term capital gains for the year from the three trades, do I have to pay taxes on the $11,500 as opposed to the $5,000 that was the final realized profit? It seems like taxes would quickly eat into any realized gains.

Also, if I made trades in a tax-advantaged account such as a Roth IRA, are the realized gains within the account counted against my gross income?
Submitted: 1 year ago.
Category: Tax
Expert:  jgordosea replied 1 year ago.
Greetings,

For tax purposes it is the increase in wealth that is subject to tax.
Capital gain, not proceeds, is what will be taxed whether it is options or stocks or any other capital asset.

So, if you profited 1500 plus 2500 plus 5000 then the total profit for the year is 9000. That is your gain subject to tax from trading.

The amount realized on the sales, the proceeds, may have been 2500 plus 4000 plus 7500 or 14000 total but the amount invested will be subtracted from that amount realized to figure your gain to be taxed.
I have used 7500 for the amount of proceeds when "re-invest that $2,500 profit to make $5,000 profit".
Amount invested was 1000 plus 1500 plus 2500 for total 5000.

Gain = proceeds minus investment.
9000 = 14000 minus 5000 in your example.

Trades within an IRA or other qualified tax deferred account are not included in income. Only when withdrawal is more from those types of account is the amount included in income; but does not get treated as capital gain or get any lower tax rate.

For Roth IRA accounts there is nothing included in income for a qualified withdrawal as the amounts going into those accounts have already been taxed.

For some of their similarities and differences and links for IRAs see http://www.irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs

Please ask if you need clarification.
Thank you.
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3034
Experience: I've prepared all types of taxes since 1987.
jgordosea and 4 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

Thanks for your quick answer, jgordosea. It was very helpful. I don't require any further clarification at this time.

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