Attention Spread Traders: Tax declaration and Form 6781

Discussion in 'Options' started by pvram68, Mar 1, 2006.

  1. pvram68


    I am sure most of the "Elite" options traders might have used spread of some kind in their options account. This is a question about the income tax returns filing when you have a bunch of spreads and rollovers from month to month.

    Is there a requirement to declaring this spread on tax form 6781 (straddles per IRA rules)? Or is there an advantage in doing so?

    The one advantage seems to be that when one or more legs make a loss in a spread which as such makes a profit, we might be able to declare the net profit without getting the effect of wash sale rule. But there are many other complexities which one might encounter, I just want to take one example:

    A Diagonal call spread is rolled over into to vertical spread for next month and is closed after 3 more weeks.

    In this scenario, is there a need to declare the diagonal spread and vertical spread separately as two different spreads? What if one spread (net of the two legs) makes a profit and the other one a loss? Will the loss be treated as a wash sale because it occurred within a 3 weeks period?

    Lastly, is the straddle rule meant to prevent just the tax-prompted loss booking? The loss deferral rule only mentions about disallowing the realized loss to the extent of unrealized profits in the offsetting position. But what if both legs of the spread are actually closed before the year end? Is then the net profit/loss of the spread directly considered without bothering about one leg being in loss and getting into a wash sale rule against the other leg in profit?

    I already made a substantial loss in my first active year of option trading, and am prepared to wait a year for booking a part of the losses if the wash sale rule forces me to do so, but am reluctant to go to a tax advisor just for this one matter..
  2. iprome


    Can someone answer these 11.5-year-old questions? :(
  3. iprome


    It seems that IRS Pub 550 talks about "offsetting positions," it only talks about straddles, and it is complicated enough. What about the treatments on vertical spreads?