Options Trading and Taxes

Please consult a tax advisor, accountant, or attorney for specific tax implications of options trading on your particular situation. The following are simply a few basic guidelines on how Internal Revenue Service (IRS) taxes impact options traders.

It is important to keep a record of all of your options trades, including confirmations of the quantities, the purchase and sale prices, the cost of purchases, and the proceeds from sales. Also, keep your monthly or quarterly brokerage statements. Your broker may send you a summary of all options purchases, but the tax regulations do not currently require this. In addition, you will receive from your broker a Form lO99-INT showing any interest paid to you during the year and a Form 1O99-DIV showing any dividends received on stocks held in your account. To ensure accuracy, review the data on all of the tax forms you receive.

Every completed options trade (an initial purchase or sale, followed by a closing sale, purchase, expiration, or assignment) results in a realized capital gain or loss of some measure, which must be reported to the IRS. Capital gains and losses on securities are generally reported on Schedule D of your tax forms. If a long option is held for less than one year before the position is closed, that transaction is considered a short-term capital gain or loss. If held for more than one year, the transaction is considered a long-term capital gain or loss. Short positions and other, more complex options positions are, in some cases, considered long-term, whereas others are treated as short-term capital gains for tax purposes. Again, you should consult with a tax advisor, attorney, or accountant for answers to specific questions you may have on tax issues raised by your options trading. You can also contact the IRS for additional guidance.