Tax implications of option selling

[OrthoSurg]

Hi fellow Canadians,
I have been a TSLA Hodler for 5 years before starting option selling in November and have made some profit from option selling in a taxable corporate account. I would like to invite everyone to share how they optimize their taxation so we all finish the year in a better tax situation. I have sold some losers in my Canadian stocks like BBD.B, WEED.TO and HPQ.V which comes to a 150k loss to offset the 150k profits I have made from a selling options and BLU. Do each 1$ of realized losses offset each 1$ of realized profit in option selling? Do you tend to buy back trades gonna bad and underwater the last week of the year to sell them back at the beginning on the following year to minimize impact on taxation?

Please share your strategies here to help others and to avoid clustering the main investors and option selling threads.

Happy Holidays to everyone.

 

[LightngMcQueen]

Yes profit and loss do offset each other within the same taxation year.

You can also carry loss to the future and apply it against gain you make in later year. Reverse is also technically possible - applying current loss to gain made in an earlier year, but it is more hassle. T2 should track loss automatically for you and CRA will know amount of your carry over losses so you can enter them next year.

There are some additional strategies that I sometimes apply for positions that recently experienced a significant drop but for which I still have long term conviction. I think the approaches are technically valid but I am not sure how CRA proof they are:

Postponing expected future gains:
- roll option positions that are at loss to similar (but not same) positions expiring in next financial year - that triggers loss in current year and postpones gains. It is important though not to immediately buy back the same ticker or in case of index ETF, different ETF tracking same index as the one that was sold- CRA will disqualify that loss as artificial.

Transferring expected future gains:
- sell position at loss in corporate account and acquire similar position in account with lower marginal rate e.g. spouse/child. Of course if it continues to tank it will incur loss in their account.

 

[MP3Mike]

FWIW on the dip today I rolled the -1000/+900 12/31 BPSes I had in cash account to -995/+895 1/7s on the dip for $9.12 added credit

Also opened same in IRA for $11.28 net credit (as new positions, leaving the same # of -1000/900 12/31s open)

FYI: You should never open the same positions in both your taxable and IRA accounts. Now your losses on the puts you bought are a wash sale and you can't claim them on your taxes. Well at least for the number of options opened in your IRA, if you had more options in your taxable account you can claim the loses on the additional positions. Your 1099 likely won't show them as wash sales, you have to figure out those on your own, since I don't know of any broker that applies the wash sale rules across accounts.

Note: this is not tax advice, consult your tax professional.

 

[Knightshade]

FYI: You should never open the same positions in both your taxable and IRA accounts. Now your loses on the are a wash sale and you can't claim them on your taxes. Well at least for the number of options opened in your IRA, if you had more options in your taxable account you can claim the loses on the additional positions. Your 1099 likely won't show them as wash sales, you have to figure out those on your own, since I don't know of any broker that applies the wash sales rules across accounts.

Note: this is not tax advice, consult your tax professional.

What are these "losses" you speak of?


More seriously I don't think what you're saying it correct.


The IRS ruling you might be thinking of says when shares, for example, are sold in a non-retirement account and substantially identical shares are purchased in an IRA within 30 days, the investor cannot claim tax losses for the sale, and the basis in the individual's IRA is not increased.


That's doing a DIFFERENT transaction on the same thing in 2 different accounts one a sale of that thing and one a purchase, within 30 days of each other- the exact thing the wash sale rule exists to deal with.

This was the SAME transaction in the 2 accounts on the same thing-- not selling thing A for a loss in one account and then buying SAME thing A in another within +/-30 days. So no wash sale of any kind happening here.


But that's also not tax advice and yeah consult a professional.

 

[MP3Mike]

What are these "losses" you speak of?

You don't ever have losses on the puts you buy as part of these BPSs?

The IRS ruling you might be thinking of says when shares, for example, are sold in a non-retirement account and substantially identical shares are purchased in an IRA within 30 days, the investor cannot claim tax losses for the sale, and the basis in the individual's IRA is not increased.


That's doing a DIFFERENT transaction on the same underlying in 2 different accounts- the exact thing the wash sale rule exists to deal with.

This was the SAME transaction in the 2 accounts.

So you aren't selling a bought put in your taxable account, for which you bought the same put in your IRA in a +/- 31 day window?

Oh, it's true. If you don't do it properly on your taxes hope you don't get audited.

If you buy a substantially identical security in an IRA within the 61 day window of selling the similar security in your taxable account you can't claim any loses incurred in the taxable account.

Wash Sales and Options -

The wash sale rule can apply to trades involving stock options.

fairmark.com

Losses on Options​

Congress amended the wash sale rule in 1988 so that it applies directly to contracts or options to buy or sell stock or securities. That means you can have a wash sale when you close an option position at a loss, if you establish a replacement position within the wash sale period. The Treasury has yet to issue regulations under this rule, and a host of questions remain unanswered. Foremost among these is the question of when one option is substantially identical to another option.

But feel free to do your own research, I just thought you might want to know...

 

[bkp_duke]

FYI: You should never open the same positions in both your taxable and IRA accounts. Now your loses on the are a wash sale and you can't claim them on your taxes. Well at least for the number of options opened in your IRA, if you had more options in your taxable account you can claim the loses on the additional positions. Your 1099 likely won't show them as wash sales, you have to figure out those on your own, since I don't know of any broker that applies the wash sales rules across accounts.

Note: this is not tax advice, consult your tax professional.

My CPA, who is literally sitting next to me at the moment on a cruise ship (who also happens to be my father-in-law), says this is not correct. The accounts are treated substantially differently because of many factors, one of which at the core is their tax basis.

Again, consult YOUR CPA, but also double-check them if they are not familiar with these kinds of trades.

 

[MP3Mike]

Last post, from me, on this issue. There are even companies that specialize in tracking your trades to calculate wash sales. Here is one that I feel goes overboard on what they consider a wash sale:

WASH SALES FOR TRADERS - TradeLog

Understand the wash sale rule and how it affects your trading. Learn how traders control wash sales to minimize harmful tax repercussions.

www.tradelogsoftware.com

 

[MikeC]

My CPA, who is literally sitting next to me at the moment on a cruise ship (who also happens to be my father-in-law), says this is not correct. The accounts are treated substantially differently because of many factors, one of which at the core is their tax basis.

Again, consult YOUR CPA, but also double-check them if they are not familiar with these kinds of trades.

I would be very interested to hear a specific explanation of why @MP3Mike is not correct, because I think he is in fact correct based on everything I have read, e.g.: Wash-Sale Rule: What To Avoid When Selling Your Investments For A Tax Loss | Bankrate

"You may not sell an asset for a loss in a taxable account and then re-buy the asset inside a retirement account such as a 401(k) or an IRA within the 30-day window and still claim a loss in the taxable account."

 

[bkp_duke]

I would be very interested to hear a specific explanation of why @MP3Mike is not correct, because I think he is in fact correct based on everything I have read, e.g.: Wash-Sale Rule: What To Avoid When Selling Your Investments For A Tax Loss | Bankrate

"You may not sell an asset for a loss in a taxable account and then re-buy the asset inside a retirement account such as a 401(k) or an IRA within the 30-day window and still claim a loss in the taxable account.

Also, it’s important to note that you cannot claim tax losses inside tax-advantaged retirement accounts, so other wash-sale rules do not apply when trading within those accounts."

They key is with options, not talking stock shares.

The other key is that the treasury hasn't given clear and defined rules of what constitutes a "similar" option. Until that is defined clearly, there are arguments that can be made in any IRS audit that if you closed say Dec 31st TSLA 1000 Puts for a loss, and bought Jan 7th 950 Puts that those are or are not similar.

My CPA has undergone many audits for clients with the IRS, and it's the differences like that that make or break a case. Because there is not Treasury guidance on exactly what constitutes similar vs. dissimilar the court usually does NOT side with the IRS (burden of proof is on the gov, not the person being audited).

If we are talking identical puts, say 12/31 1000 Puts closed for 1/7 1000 Puts, then sure, there is no argument. That's like getting the same shares.


Not advice, consult your CPA, and measure your own risk tolerance for an audit. Given my CPA, I have a relatively high tolerance for something like this because I know he will handle it in an audit and fight hard for the position, but not everyone is willing to go through that.

 

[MikeC]

If we are talking identical puts, say 12/31 1000 Puts closed for 1/7 1000 Puts, then sure, there is no argument.

Agreed. @MP3Mike was talking about the exact same option contract in taxable and IRA and he was told he was wrong.

 

[Oil4AsphaultOnly]

I would be very interested to hear a specific explanation of why @MP3Mike is not correct, because I think he is in fact correct based on everything I have read, e.g.: Wash-Sale Rule: What To Avoid When Selling Your Investments For A Tax Loss | Bankrate

"You may not sell an asset for a loss in a taxable account and then re-buy the asset inside a retirement account such as a 401(k) or an IRA within the 30-day window and still claim a loss in the taxable account."

MP3Mike is wrong. Referencing anyone else other than the IRS themselves is hearsay. Here's IRS Pub 550: Publication 550 (2020), Investment Income and Expenses | Internal Revenue Service

If you search for "wash sales", you'll find it under the section for determining "holding periods", because that's all that it's about:
"
Wash sales.
Your holding period for substantially identical stock or securities you acquire in a wash sale includes the period you held the old stock or securities.
"

There are NO long-term/short-term holding period determinations in an IRA, so it does NOT affect the holding period status (and thus wash sale determinations) of your trades in the taxable account. The "across different accounts" situation is for people who have multiple taxable investment accounts (potentially with different brokers to try to hide the short-term/long-term trades from each other).

Edit: I messed up.

 

[Oil4AsphaultOnly]

MP3Mike is wrong. Referencing anyone else other than the IRS themselves is hearsay. Here's IRS Pub 550: Publication 550 (2020), Investment Income and Expenses | Internal Revenue Service

If you search for "wash sales", you'll find it under the section for determining "holding periods", because that's all that it's about:
"
Wash sales.
Your holding period for substantially identical stock or securities you acquire in a wash sale includes the period you held the old stock or securities.
"

There are NO long-term/short-term holding period determinations in an IRA, so it does NOT affect the holding period status (and thus wash sale determinations) of your trades in the taxable account. The "across different accounts" situation is for people who have multiple taxable investment accounts (potentially with different brokers to try to hide the short-term/long-term trades from each other).

SH*T! I didn't thoroughly search the pub before posting. There's a separate "Wash Sale" section:
"

Wash Sales​

You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

1. Buy substantially identical stock or securities,
2. Acquire substantially identical stock or securities in a fully taxable trade,
3. Acquire a contract or option to buy substantially identical stock or securities, or
4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA

"

My bad!

 

[MP3Mike]

MP3Mike is wrong. Referencing anyone else other than the IRS themselves is hearsay. Here's IRS Pub 550: Publication 550 (2020), Investment Income and Expenses | Internal Revenue Service

If you search for "wash sales", you'll find it under the section for determining "holding periods", because that's all that it's about:
"
Wash sales.
Your holding period for substantially identical stock or securities you acquire in a wash sale includes the period you held the old stock or securities.
"

There are NO long-term/short-term holding period determinations in an IRA, so it does NOT affect the holding period status (and thus wash sale determinations) of your trades in the taxable account. The "across different accounts" situation is for people who have multiple taxable investment accounts (potentially with different brokers to try to hide the short-term/long-term trades from each other).

From the IRS: 2021 Instructions for Schedule D (2021) | Internal Revenue Service

Wash Sales​

A wash sale occurs when you sell or otherwise dispose of stock or securities (including a contract or option to acquire or sell stock or securities) at a loss and, within 30 days before or after the sale or disposition, you:

1. Buy substantially identical stock or securities,
2. Acquire substantially identical stock or securities in a fully taxable trade,
3. Enter into a contract or option to acquire substantially identical stock or securities, or
4. Acquire substantially identical stock or securities for your individual retirement arrangement (IRA) or Roth IRA.

So take these transactions as an example:

1. Buy 12/31 900 put in taxable account on 12/20/2021
2. Buy 12/31 900 put in IRA account on 12/20/2021
3. Sell 12/31 900 put in taxable account on 12/29/2021
4. Sell 12/31 900 put in IRA account on 12/29/2021

Even considering that transactions 3 and 4 were part of a roll, transaction #2 makes any losses realized in transaction #3 subject to the wash sale rules. And given that #2 is in an IRA you can never claim those losses. (Even though transaction #4 realizes the same exact losses.)

And now I really won't post about this again...

 

[Knightshade]

I'm interested in this question as well. I took the opportunity during the summer to leverage some shares into DITM LEAPs (patting myself on the back). Several in the $300-$500 range expiring Jan 2023 and Mar 2023. These are all in non-taxable accounts.

My current thinking is to just wait until we get close to expiration, then de-leverage by selling enough to exercise as many of these into shares as possible.

To my knowledge it never makes sense to exercise them in a non-taxable account.

Since there's no tax consequences, and time value is always going to be more than $0 until right AT expiration, you're better off selling them to recapture whatever time value is there and immediately buying shares with the funds resulting.


Different story when taxable as exercising avoids any tax burden that selling to buy shares would cause (either ST or LT depending on holding period of the calls)

 

[MP3Mike]

My CPA, who is literally sitting next to me at the moment on a cruise ship (who also happens to be my father-in-law), says this is not correct. The accounts are treated substantially differently because of many factors, one of which at the core is their tax basis.

I highly suggest that you look for a better CPA... (Or maybe he just didn't understand what was being discussed.)

 

[intelligator]

You don't ever have losses on the puts you buy as part of these BPSs?

To better understand the deduction possibilities in a taxable account, aren't the losses on the bought puts accounted for already categorized as realized losses that go against the realized gains to calculate net gains? Fidelity breaks out Realized Gain/Loss YTD for short and long term, also the disallowed wash sales that I'll have to better understand. Is there more to it than that? This is my first year reporting options trades, will speak with my CPA for sure.

Thanks for this thread ... the more insight I gain, the less of a shock, I suppose

 

[MP3Mike]

To better understand the deduction possibilities in a taxable account, aren't the losses on the bought puts accounted for already categorized as realized losses that go against the realized gains to calculate net gains? Fidelity breaks out Realized Gain/Loss YTD for short and long term, also the disallowed wash sales that I'll have to better understand. Is there more to it than that? This is my first year reporting options trades, will speak with my CPA for sure.

Each transaction is accounted for separately. So while you may put in a single BPS order, it is actually two different transactions and the loss/gain is calculated separately for each. The issue is only if you trade the same put in both a taxable and IRA account. If you do that the losses aren't deductible in the taxable account. (Even though Fidelity would show it is in your realized gain/loss reporting and on your 1099.)

As far as I know there are no brokers that report the wash sales that occur from transactions across different accounts/brokerages. You have to do that yourself.

 

[MikeC]

I'm wondering if letting an option expire tomorrow would push the gain out to 2022, because Saturday is when my brokerage shows the transaction as occurring for expired options? As opposed to closing it out on Friday before close.

 

[kabin]

Regarding options and taxes, I've found the deeper you get into it the more recordkeeping becomes a nightmare. You do a few thousand option trades per year and you end up wading though spreadsheets to recreate/reconnect complex trades/rolls so you can generate your account's P/L for quarterly estimated taxes for both state/fed returns. It gets even uglier when you have multiple accounts (cash, trust, 529s).

There are online services that claim to be options friendly but they get pricey and the reviews are hit/miss. Hopefully a good option broker will one day develop tools to offload that burden. I'm not aware of any option broker that takes taxes into consideration. The only broker able to track option trade P/L through rolls is Tastyworks but again they don't acknowledge tax as an issue so you are still pretty much on your own.

I suspect options premium selling customers are transitory (just testing the waters before moving on) and so day trading-like options brokers have no plan to ever add such features.

 

[kabin]

I'm wondering if letting an option expire tomorrow would push the gain out to 2022, because Saturday is when my brokerage shows the transaction as occurring for expired options? As opposed to closing it out on Friday before close.

Sorry, I didn't see this until now. It all depends whether the option trade expires in or out of the money.

End of Year Position Reporting

Do you want to close a position before the end of the year to harvest a profit or loss? If you wish to have a position report as a profit or loss, please be aware there are deadlines to close a position to count towards the 2023 tax year. 2023 ...

tastyworks.freshdesk.com