Well, if you're going to tag me I'm going to have to respond.
Seeking Help from the TSLA Options and Tax planning Veterans
Dear all, I find myself in a fortunate dilemma and could appreciate some advise from ya'll [Summoning my self-declared mentors
@ggr @DaveT @FrankSG @Papafox for their blessed guidance, I have learnt a huge deal from you over the years!]
Problem statement:
=> Investment style/Premise: I have core TSLA position accrued over the years, and prefer to HOLDDDD for a long long time on retirement/post-tax/IRAs. I do not need the money and want it to grow as long as sensible. I am OK with a highly concentrated portfolio % on TSLA, I understand the risks.
=> Picked few Sept 2020 $800 strikes
in my post-tax brokerage, had bought these as way-OTM calls at paltry premiums which have now gone into orbit with our astronauts!
[How I wish I did these in Roth IRA/401k but that's another story for later]
=> Given this unique About-to-be-hit-by-the-TAX-train situation what would you gentlemen/ladies advise?
Please assume this year will be record taxable gains like never ever before due to other winning trades [blame AMZN OTM calls], any probably never in the future [since I hope to plan better hereafter]
Options:
First disclaimer: I am not an accountant nor a tax lawyer, you can't rely on me being right. But I have had to deal with the situation before, and being complicated by being taxed in both the US and Australia, I had to understand some of it.
- Sell ALL/100% of these Sep 2020 $800 contracts for lofty profits
- Short term federal and state [CA] Cap-gain tax on entire profits, curl up and cry writing the tax check
Well, sometimes you have to lie in the bed you made. If you do go this route, though, remember one REALLY IMPORTANT thing. There will be time between when you sell and get the cash, and when the bill to the IRS/FTB comes due, and you want to make really sure that when you have to write those cheques, the actual cash is where it needs to be. A friend of mine, back in the Qualcomm years, made money out of selling options (employee options, not calls), bought a house with the proceeds, and exercised some more options to buy and hold the stock. After the bubble burst and his Qualcomm stock had dropped back down, he had to finance the house on short notice to meet the tax bill. I even fell for this myself last year; I had a windfall from a private investment in Australia, owed tax in the US, and the wire transfer failed for no explicable reason. It cost me a few thousand to get a short term loan to pay the taxes, even though I had the money. Don't invest the cash in something that might tank (like TSLA). There is a use for T-bills.
- Sell few of these Sep 2020 $800 contracts, use that money towards exercising the remaining contracts for N x100 TSLA shares and sail into the sunset for years.
- Short term Cap-gain-tax on sold options. What about the ones I exercise to buy [I have never really exercised options, and does it matter when I exercise them - now vs closer to expiry, its all the same I suppose since premium is lost]
It's pretty rare to want to exercise early, for the reason you note, which is that you lose the time value. $587.35 (current bid) + $800 strike = $1387.35, minus $1371.58 (closing price that that bid corresponds to) means that the current time value (Theta) is $15.77, which is around 2.7% of the option value. It will be even less tomorrow. At this point $800 strike counts as pretty "deep in the money". Do you care about that 2.7%? Maybe not.
You will owe tax (as above) on the contracts you sell. You don't owe tax (yet) on the ones you exercise. Instead, you put stock in your brokerage account with a cost basis of $800 plus whatever you paid for the option, and a purchase date of the date you exercise, whether it's early or in September. This is one case where you might exercise early: to start the long term capital gains clock. But only you know what your individual situation might be in a year.
- Exercise ALL of these Sep 2020 $800 contracts [I can arrange for the capital] but this would mean my TSLA position becomes TOO concentrated [I am comfortable with that] but I do also have $350 Jun 2022 and Sep 2021 $1000 strikes which also fall in the problem statement.
No current tax liability if you do this. Exercising the option is not, itself, a taxable event.
- Roll over to OTM? Would still be taxed, perhaps a preferable approach? Please shed some light on this.
Many many thanks for your insights/pointers!
Rolling the option is really two separate transactions. You will incur tax on the sale leg, as if you had just sold them, see (1) above. (I lost the paragraph numbering, sorry...)
"Don't let the tax tail wag the income dog." -- one of the best pieces of advice I was given when a pup, by the chairman of my first startup (which failed miserably).
