Quick question on taxation of options- I know different regimes will tax the premiums received for sold calls differently, but my question is on put premiums paid. Isn’t it true put premiums paid, in some regimes, increase your cost basis in subsequent years? I have a note about this, but do not understand why this it the case?
thnx…
The buyer of an option generally has a capital gain or loss after they exit, and their holding period is either short or long… Unless you’re buying a leaps (long term option) you probably will have a short term capital gain/loss. If you are using a protective put, that would increase your cost basis. A capital loss can only be utilized by offseting a capital gain, or carried over to the next year (outside of the $3K loss limit in the US tax code). The problem is you may be forced to sell shares on a covered call which will trigger ordinary income depending on the tax treatment of the shares (deferred comp or whatever they site in the example).
Now there are also index options which are treated different. This has to do with section 1256 of the tax code, which allows 60% of an index option (and futures) to be treatdd long term gain and the other 40% at short term gain, immediately without any holding periods. That is beyond the CFAI 