Options Trading and Taxes
I'm trying something different.
Today's blog is just a short quick info about taxes and options trading.
Always consult with your financial expert before engaging in options trading so you do not get shocked when it comes to filing taxes.
Everything i've written here are for your information only and not to be take as legal financial advice.
I talk about American Options and not European Options. With American options, a contract can be exercised before expiration.
These are tid bits I put together after reading Conservative Options Trader. I love that book.
One of the benefits of investment income is the potential for lower taxation. However, you have to be careful on turning your long term stock holdings into short term capital gains when you trade options.
The main takeaway is to hold your investments over a year in order to qualify for long term capital gains. This also applies to your options contracts.
You don't get taxed on premiums you receive when you write option contracts until you close the position, your contract expires worthless, or your shares get assigned.
You break your long term stock holding condition per the IRS if you trade ITM (in the money) covered calls. Fidelity has great examples of this here. This is because your contract has a high probability of getting called away.
The premiums you receive from selling are considered short term capital gains, if your contract expires worthless, you close the position, or you get assigned in less than a year. It behooves you to sell OTM options and LEAPS (Longterm Equity Anticipation Securities) if you want to avoid paying short term capital gains.
If you have a carryover loss, then it makes sense to realize some short term gains since the losses will offset the gains. Preferably you'd want to offset them up to the amount of the loss if at all possible.
As a side note,
Active income is offset by active losses.
Passive income is offset by passive losses, except!
If you have a w2 you can offset active income up to $3,000 per year from your investment losses.
Also, qualified dividend income although taxed as long-term capital gains can only be offset by capital loss up to $3,000.
I know right? Tell me about it.
Carryover losses can be carried over indefinitely until it is all used up.
If you are a designated trader per the IRS, all this up here does not apply to you. But you already know that. I hope.
That's all for today.
Stay informed. See you next time!
-Pam
P.S. here is a resource about options and taxes
As a reminder, I created this blog to share information and to increase everyone's financial literacy. This serves as my notebook that I willingly share publicly to help others increase their curiosity and knowledge in wealth building and money management. I am not an official financial advisor, lawyer, or accountant. You will not find legal advice in this blog. Read the full terms and conditions here.
