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If I write puts that end up assigned, meaning I purchase the underlying security, are any taxes generated by the option in the year when it gets assigned? Are taxes only generated when the underlying security is sold?

From what I can tell, the IRS handles option assignment by adjusting the cost basis, so if the contract premium was $200 but purchasing shares from assignment cost $2000, the adjusted basis would be $1800. This implies that a tax obligation isn't generated until the shares are sold (using the adjusted basis of $1800). Is that correct?

This just seems strange since the premium would generate short-term capital gains if the option simply expired without being exercised.

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It's a reportable gain or loss if you buy or sell to close an option or it expires.

If you are assigned on a short option, the underlying's price is adjusted by the amount of the option premium. So if you were the writer of the put and you were assigned, you would reduce your cost basis in the underlying by the amount you received for selling the put.

See IRS publication 550, page 58 for details.

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  • Bob, specifically, would this mean that there are no tax implications in the same year if the underlying security is held for the rest of the year? My original question was looking to clarify the timing based on my understanding of how an adjusted basis works.
    – Hari
    Commented Nov 12, 2022 at 6:39
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    If a short option is assigned, there are no tax implications until the underlying position is closed. Commented Nov 12, 2022 at 17:00

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