When does selling (writing) options count for tax purposes?

Question

Let's say I sell an option (say a naked put) that expires in January. If I wait until January to let it expire, does that mean the profits will count towards next year's taxes? Or since I actually sell the option this year, does it go against this year's profits?

Answer 1

Generally speaking, you realize options gains or losses for (US) tax purposes when you close out the option position, or when it expires so in your example, if you're discussing an equity option, you'd realize the gain or loss next year, assuming you don't close it out prior to year end.

But options tax treatment can get messy fast:

• The above is not true for options on broad-based indices (like the S&P 500). So-called "1256 contracts" on such indices realize gains or losses based on the mark-to-market value at year end, regardless of when they are closed or expire.
• If you have other positions in options on the same underlying stock, or the stock itself, it's more complex. For example, if you had sold shares of the stock at a loss in the 30 days prior to selling deep in the money naked puts, you'd likely trigger the wash sale rule, forcing you to defer the losses you took in the stock.
• Similarly, if you shorted stock this year while you had gains in the naked put position, you would potentially trigger the "short sale" rule, which would force you to realize gains on the naked put this year, unless you qualify for something called the "short-term hedge exemption".

Still, if you have no other stock or option positions in the underlying during or within 30 days of the establishment of the naked put, and assuming the option isn't assigned, you won't realize any gains or losses until the year in which the option is closed or expires.

Answer 2

If you take the profit or loss next year, it counts on next year's taxes. There's no profit or loss until that happens.