Thursday, July 9th, 2015

Taxes on Option writing?

Recently I have developed a strategy to profit from writing call options, which have demonstrated through backtesting and trade of paper, to be a great success. What worries me are the tax consequences on my return. How will I be taxed? I know that benefit from short-term premiums out of the options is taxed at the rate of short-term just as the profit out of a place of safety less than a year grava.Mi question is: I can pay a tax additional income on top of this tax on capital gains? If I could, here is an example, could use this as a reference for your reply. . . Suppose I manage to gross $ 1,000 / week for an annual salary of $ 52,000. What will my net income? Thanks! Just what I am punished about how no profits “quick and easy” in the stock market. Let it be known that I have been an active broker for over 8 years. I have a Masters in Mathematics I apply to my studies, my backtesting is complete and I understand the concept of accepting losses with gains. Please do not preach to me, all I’m asking is a question regarding the taxation of benefits. Thanks! To add to the previous set of details, I’m not ignoring the put option written. I am writing both put and call options. again, my strategy is based on a mathematical study my only concern is the income tax. Please what I’m really looking for is to understand the tax braacket I would fall in. If someone could please give me an example using the scenario of profit 1K per week (or $ 52K per year) greatkly would be appreciated!

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4 Responses to “Taxes on Option writing?”
  1. beancounter says:

    It should just be short-term capital gain income.

    One caveat: if this is your only source of income and/or you are trading very frequently you could possibly be considered involved in a trade or business. In which case you pay an additional @14% self-employment tax (.9235*.153). Since writing options usually means holding a position for a month or more I doubt you’d be considered trading frequently. But it might be worth it to consult a CPA or Enrolled Agent with your specific circumstances.

    If you can stand reading legalese here are some relevant cases you can google:

  2. Joe P says:

    The only taxes are the short term capital gains which are taxed as ordinary income. I hate to burst your bubble but strategies such as yours always have a flaw. Open an account and do real trades in small amounts while you discover the flaws. Don’t be counting your money until you have made it. In investing, wisdom comes slowly and you will know it when you have it. You will understand how little any of us really know about the future. But you will have arrived at a place that allows you to make money more often than not and accept the losses as part of the program.

  3. zman492 says:

    First, you need to determine if you will be filing taxes as a “trader” instead of an investor. For a discussion of filing as a trader see the guide at

    http://www.fairmark.com/traders/index.htm

    Assuming you will not be filing as a trader, your profits and losses will normally be taxed as gains and losses like any other trades. There are, however, some special rules you should know about.

    (1) If an options expires it is considered closed on the expiration date at a price of $0.00.

    (2) If an option is exercised, the option premium is used to adjust the price of the underlying.

    (3) If you write a covered call it will be considered either a “qualified covered call” or part of what the IRS calls a “straddle.”

    (4) If you have offsetting positions (spreads), excluding qualified covered calls, you may have to defer losses you incur until a later tax year.

    See pages 56 hrough 61 of IRS Publication 550 at

    http://www.irs.gov/pub/irs-pdf/p550.pdf

    and/or the brochure at

    http://www.optionseducation.org/resources/literature/files/taxes_and_investing.pdf

    for more information on these issues.

  4. chartley says:

    Congratulation to you on learning how to make money writing (selling) options. Don’t ignore the writing (selling) PUT. Your writing call works during downturn but not up.
    To answer your question, it would be consider short term.
    If you plan to do this more often, you should start a LLC or corporation so you can take tax advantages as a trader, otherwise it is hard to prove under current tax guideline as a daytrader.

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