I didnt understand why we say that we can defer capital gain taxes by buying a put option
I mean when you buy a put option and the price of the asset declines, you still have to sell the stock at the strike price and pay taxes
Like how is the put helping to defer capital gain taxes?
No, you do not “have to sell” the stock. As the holder of a put option, you get paid when the price of the underlying stock goes down which offsets your losses on the shares you already own, basically locking in a value. Since you never sold your stock, you are deferring the capital gains.
To be clear, you’re talking about settling the option in cash, rather than delivering the underlying.
so does it mean you still retain the shares and you just exchange cash?
Yup.