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Tax implications for converting leaps?


wescobrk
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I think this was posted a long time ago but I wanted to ask those on the board that have bought leaps and then convert to the shares--how would the taxes work if the stock is subsequently sold? Does the cap gain rate apply for anything after the conversion and the marginal rate apply for the amount paid for the option leap call?

 

If you don't mind, please lay out if buy a call and then convert within a few months and then sell the stock less than 12 months and then greater than 12 months.

 

Thanks!

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The short answer is that if you exercise a call or "leap" call, your holding period for capital gains treatment begins on the date of exercise.  So, if after you've exercised, you sell the stock within 12 months, it is a short-term capital gain.  If you sell the stock after 12 months, it is a long-term gain.

 

If you hold a call option and sell it (without exercising), it is a short-term gain if sold within 12 months and long-term after 12 months.

 

If you sell / write a put and the put expires without the underlying having been put to you, it is always a short-term gain (no matter how long you've held it).  If the underlying stock is put to you, your holding period on the stock begins when it is put to you. 

 

There is a lot of additional detail (worth knowing if you're interested).

 

 

In the U.S., see this link (and search for "puts" and you'll find the section):

 

 

http://www.irs.gov/publications/p550/ch04.html#en_US_2011_publink100010627

 

 

Below is an excerpt:

 

"Puts and Calls

 

 

Puts and calls are options on securities and are covered by the rules just discussed for options. The following are specific applications of these rules to holders and writers of options that are bought, sold, or “closed out” in transactions on a national securities exchange, such as the Chicago Board Options Exchange. (But see Section 1256 Contracts Marked to Market, earlier, for special rules that may apply to nonequity options and dealer equity options.) These rules are also presented in Table 4-3.

 

Puts and calls are issued by writers (grantors) to holders for cash premiums. They are ended by exercise, closing transaction, or lapse.

 

A “put option” is the right to sell to the writer, at any time before a specified future date, a stated number of shares at a specified price. Conversely, a “call option” is the right to buy from the writer of the option, at any time before a specified future date, a stated number of shares of stock at a specified price.

 

Holders of puts and calls.  If you buy a put or a call, you may not deduct its cost. It is a capital expenditure.

  If you sell the put or the call before you exercise it, the difference between its cost and the amount you receive for it is either a long-term or short-term capital gain or loss, depending on how long you held it.

  If the option expires, its cost is either a long-term or short-term capital loss, depending on your holding period, which ends on the expiration date.

  If you exercise a call, add its cost to the basis of the stock you bought. If you exercise a put, reduce your amount realized on the sale of the underlying stock by the cost of the put when figuring your gain or loss. Any gain or loss on the sale of the underlying stock is long term or short term depending on your holding period for the underlying stock.

 

Put option as short sale.  Buying a put option is generally treated as a short sale, and the exercise, sale, or expiration of the put is a closing of the short sale. See Short Sales, earlier. If you have held the underlying stock for 1 year or less at the time you buy the put, any gain on the exercise, sale, or expiration of the put is a short-term capital gain. The same is true if you buy the underlying stock after you buy the put but before its exercise, sale, or expiration. Your holding period for the underlying stock begins on the earliest of:

The date you dispose of the stock,

 

The date you exercise the put,

 

The date you sell the put, or

 

The date the put expires.

 

 

 

Writers of puts and calls.  If you write (grant) a put or a call, do not include the amount you receive for writing it in your income at the time of receipt. Carry it in a deferred account until:

Your obligation expires;

 

You buy, in the case of a put, or sell, in the case of a call, the underlying stock when the option is exercised; or

 

You engage in a closing transaction.

 

 

  If your obligation expires, the amount you received for writing the call or put is short-term capital gain.

  If a put you write is exercised and you buy the underlying stock, decrease your basis in the stock by the amount you received for the put. Your holding period for the stock begins on the date you buy it, not on the date you wrote the put.

  If a call you write is exercised and you sell the underlying stock, increase your amount realized on the sale of the stock by the amount you received for the call when figuring your gain or loss. The gain or loss is long term or short term depending on your holding period of the stock.

  If you enter into a closing transaction by paying an amount equal to the value of the put or call at the time of the payment, the difference between the amount you pay and the amount you receive for the put or call is a short-term capital gain or loss."

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