0

If I sell a put and only close the transaction after 12+ months of holding that position, is it a long- or short-term capital gain/loss?

Some more context: For part of my portfolio, I sell some long-duration cash-secured puts. I am moving to the US and trying to figure out what the tax treatment would be. I am seeing conflicting information online e.g. [1] says it's short term gains even if the duration is more than 12 months while [2] says it's long term gains if it's held for more than 12 months. Is there some reliable source I can get such information from given the conflicting info online?

[1] https://www.marketwatch.com/story/how-stock-options-are-taxed-2015-03-18

[2] https://budgeting.thenest.com/tax-treatment-selling-put-options-25842.html

Improve this question

1 Answer 1

Reset to default
1

The Marketwatch article is correct:

When a put or call option expires, you treat the premium payment as a short-term capital gain realized on the expiration date. This is true even if the duration of the option exceeds 12 months.

See page 58 of IRS publication 550 for how options are handled.

Improve this answer
4
  • Incredible, doesn't get more reliable as a source than the actual IRS publication :) I always thought IRS publications had a reputation to be very cryptic 800 page tomes of indecipherable and inaccessible rules. But that publication you mentioned is incredibly accessible and understandable. Thanks for sharing!
    – David Karam
    Commented Jun 11, 2021 at 17:52
  • Any thoughts on the rationale behind it always being a short term gain regardless of whether you hold it for more than 12 months? The only thing I can think of is that it's a decaying asset so in a way it's better modeled as an income generating asset where the income generated is pro-rated per day of decay. Is that the main rationale?
    – David Karam
    Commented Jun 11, 2021 at 17:53
  • And one follow-up question if you could spare the time, this blows up my cash-secured put strategy to generate income while keeping some margin of safety on companies i would like to buy if their price went down. This being taxed as short-term vs. long-term really changes the economics of the gains. Is there some similar strategy that is a bit more tax efficient? I'm moving from Switzerland where capital gains tax is 0% which really skewed the kinds of strategies that made sense. Now I need to think of what would be similarly semi-conservative as cash-secured puts but also tax efficient...
    – David Karam
    Commented Jun 11, 2021 at 17:56
  • 1
    I have no idea why the IRS treats writing a long term option held for more than a year as a short term holding period. If you write puts and you are assigned, the put's cost basis is folded into the cost basis of the stock (decreased). However, the holding period for the stock begins on the date you buy it, not the date you wrote the put. I don't know what "would be similarly semi-conservative as cash-secured puts but also tax efficient."
    – Bob Baerker
    Commented Jun 11, 2021 at 19:04

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .