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My broker tells me that option transactions are reported for tax purposes as two independent transactions. That is, the net profit or loss is not reported. Instead, the receipts from the sale of the option and the cost of the option purchase are reported separately as a profit and loss respectively.

I was also told that these reports apply to the tax-year in which they occur. If, for example, I buy an option this year, the entire cost is reported as a loss for this year. If I sell it back next year, the entire receipt of that sale is reported as a profit on my next-year tax return.

That seems to suggest that one could create a loss this year (perhaps to offset a gain elsewhere) by buying an option on Dec 31, 2020, and then selling that option on Jan 4, 2021. The two amounts will not be exactly the same, but let's assume they are close. Haven't I essentially moved a net gain from this year to next year?

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    I don’t think that is correct; and as you say, it makes no sense. Buying an option is treated like buying a share or any other security - the buy is recorded, but has no tax impact. The sale triggers the tax impact, on the difference = gain/loss.
    – Aganju
    Commented Dec 17, 2020 at 8:23
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    At least the three brokerages I trade on do it that way.
    – Aganju
    Commented Dec 17, 2020 at 8:24
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    Tax questions should have a country tag.
    – Chris W. Rea
    Commented Dec 18, 2020 at 2:15

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In the US, option transactions are reported on daily statements as two independent transactions on whatever day they occur. For tax purposes, they are not reported separately as profit and loss. If you buy (or sell) an option this year and it expires next year, it has no bearing on this year's taxes unless you close the position this year.

I can't speak for all brokers but for every one that I have dealt with, the pairing of closed transactions occurs on the year end 8949 Form which not only determines the gain or loss on closed positions but wash sales, if incurred.

Furthermore, the IRS goes to great extent to prevent you from fabricating artificial losses this year and deferring the offsetting gains until next year. Some examples of this are the wash sale rule, the prohibition against shorting against the box, and the qualified covered call and constructive straddle rules.

The only way that this year's losses on open positions can be deducted this year is if you are a very heavy trader or market professional and you have been granted Tax Trader Status by the IRS.

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  • Bob, are the IRS rules equally picky with postponing profits? I bought a call that is now deep in the money, and I want to secure the gain, but not pay taxes in this year. So I could short-sell a slightly different call (a week shorter or whatever) for cash now, and trigger the 'profit' next year in Feb by closing both positions out together for little money. The rules I read seem all to talk about losses only?
    – Aganju
    Commented Dec 18, 2020 at 4:45
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    Section 1092 straddle rules apply to any type of multi-legged option position, such as straddles, strangles, vertical spreads, butterflies, condors, et al. Its purpose is to prevent traders from taking losses in the current year, while holding on to and deferring the gains in the offsetting positions. The IRS has no claim on when you take profits so converting your long call to a spread would not run afoul of the rule as long as both legs are closed next year.
    – Bob Baerker
    Commented Dec 18, 2020 at 5:07
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Note that how things are reported isn't necessarily exactly how they should be filed. I've had brokers that "reported" a zero cost basis for stocks that I received as compensation, but when I file I'd set the actual cost basis appropriately. I've never been audited or even questioned, so I'd say that the these reportings aren't taken as gospel.

What matters is how you file, which is based on current tax laws. Option premiums aren't a "loss", you'd report and actual gain or loss when you sell the option, using the premium as the cost basis.

So no, you can't buy an option on Dec31, count a loss, and sell it on Jan1 and report a gain.

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