I have an account with TDAmeritrade (now Schwab), and notice that the cost bases of stocks I acquired through assignment as a result of selling puts, are all reduced to reflect the premium acquired from the puts. IB does not do this, and I can't remember any other broker I have used doing it either. IB always shows the cost basis as the price at which you sold the puts. My understanding is that where taxes are concerned we pay taxes on the income we receive from the premium, so I am trying to figure out the reason why TD/Schwab is doing this. It seems this would increase your taxes since you would be paying taxes first on the premium received, then on the stock when you sell it, since it will have an artificially low cost basis. Is there something I am misunderstanding here? Thanks in advance to anyone who can clarify.
premiums would be subtracted from the assignment piece as cost basis, it is pretty uniform these days.
Do you know the reason IB doesn't adjust for it in the cost basis they show on their platform? Regarding taxes, it seems there is conflicting information. The first article about it I read said the premium does not lower your CB. But I just found this, which is more reassuring: "When you sell a put option and it gets assigned, the premium you received is not taxed at the time of assignment. Instead, the premium received reduces your cost basis in the underlying shares. This means the premium impacts your tax liability when you eventually sell the shares."
The following text is from page 87 IRS Publication 550, Investment Income and Expenses. Writers of puts and calls. If you write (grant) a put or a call, do not include the amount you receive for writing it in your income at the time of receipt. Carry it in a deferred account until: Your obligation expires; You buy, in the case of a put, or sell, in the case of a call, the underlying stock when the option is exercised; or You engage in a closing transaction. If your obligation expires, the amount you received for writing the call or put is short-term capital gain. If a put you write is exercised and you buy the underlying stock, decrease your basis in the stock by the amount you received for the put. Your holding period for the stock begins on the date you buy it, not on the date you wrote the put. If a call you write is exercised and you sell the underlying stock, increase your amount realized on the sale of the stock by the amount you received for the call when figuring your gain or loss. The gain or loss is long term or short term depending on your holding period of the stock. If you enter into a closing transaction by paying an amount equal to the value of the put or call at the time of the payment, the difference between the amount you pay and the amount you receive for the put or call is a short-term capital gain or loss. The cost basis displayed by the broker on your positions screen, or whatever you may be looking at, is irrelevant. The only data that matters is what appears on Form 1099-B after the close of the calendar year. The data on Form 1099-B is probably accurate 99% of the time. When a put is assigned, the the broker will reduce the stock basis by the put premium, and the put premium will not be reported as income. In most cases, the brokers get it right. You can check it by doing the math yourself. If they get it wrong, you can enter an adjustment on Form 8949, with a code to identify the reason for the adjustment, i.e., the basis shown on Form 1099-B is incorrect. See page 8 of the instructions for Form 8949. But be careful with those adjustments LOL. If you make an adjustment on a large transaction, you better make sure it's accurate, and you better have the data and documents to back it up. The IRS may ask about it, and if you can't back it up, they'll refigure your taxes and send you a bill. And they send out letters about this stuff a year or two after you file your return. And when they refigure it, you get charged interest on the unpaid tax.
Very interesting you bring this up. I brought this up here a few days ago... https://www.elitetrader.com/et/thre...premium-getting-assigned.382976/#post-6085825
I called one of the brokers and he specifically said that when you sell a put and are assigned the price of the assignment does NOT include in the cost basis the premium collected. I just had another assignment on Friday and did collect a sizeable amount of premium and when I looked at the cost basis the premium I collected was NOT in the cost basis. I'm seeing very different feed back from a question I thought was very simple to answer.
You can ask 28 different tax guys and or call up 89 different financial institutions about this 1 question and you will not get 1 straight answer. There will always be conflicting information....
Did you read the 1st post by poster. They state; "Regarding taxes, it seems there is conflicting information. The first article about it I read said the premium does not lower your CB. But I just found this, which is morereassuring:: "When you sell a put option and it gets assigned, the premium you received is not taxed at the time of assignment. Instead, the premium received reduces your cost basis in the underlying shares. This means the premium impacts your tax liability when you eventually sell the shares."