taxation on option spread.

Hi there,

I am a beginner of option trading I have made some put and call spreads on a stock within 30 days period. I know it is too late to elect Mark-to-Market for this year. I want to understand my tax liability. However, I am lost on the topic.

Could someone recommend some good books, articles, where I could learn more through examples?
Any software out there helps to figure out and minimize taxation on option spreads trading?

Thanks for your help!

Regards,
Andrew

 

Try "Tax Guide for Traders" by Green. You can't escape shortterm capital gain rate unless you adopt "trader status"
or have Capital Loss Carryovers.

 

I tried to read through his website. Could I still setup an identity and elect MTM for this year's tax?

 

You can always trade options that qualify as 1256 contracts. These contracts have favorable tax treatment in that no matter how long you hold the position (1 second, 1 minute, 1 month etc.) 60% of your gains are taxed at the long term gains rate and 40% are taxed at the short term gains rate.

 

Does 1256 allow Stock options?

 

Let me be more specific,

I trade some option spreads on AAPL (Apple)
I also traded some IRON conder on GS.
They are not future or index.
Does 1256 apply to me?

 

No. Only Broad-Based Index Options qualify

 

I think as a general view on taxation - we the trader community should simply do trades that make sense. Washington will eventually get around to taxes maybe later this year and everything will end up on the table. 60/40 - capital gains - treatment of dividends - trader tax, etc. They are not going to let the year end without visiting the lack of an estate tax this year. Old saying "Hope for the best - expect the worst"
60/40 came out of the mixed straddle rule and I know of no one who really expects it to survive in the long run

 

Personally, I don't think you should let taxes dictate how you trade. The differences between various tax strategies aren't that significant (i.e. long-term vs. short-term capital gains). A lot of times, you miss big opportunities (+100% short-term gains), because you're worrying about the taxes. I'd much rather pay a 50% tax on a 100% gain, than try to squeeze taxes down to 28% and make only a 10% gain.

 

I agree you should execute the strategy that works for you but the only point I would make is that if you trade spreads on a board based index why not be aware of the tax consequences and save yourself some money.