Booking profits or losses from buying to close a short position or selling to close a long position is pretty straightforward, but how is it treated when you exercise an option or if you get assigned? Options can be complicated but add tax treatment to it, and you wind up with one complex cocktail. That's why we've broken it down below.
- Review of exercise and assignment of puts and calls
- Assignments from short options
- Exercising long options
- Rolling Trades
Tax Treatment for Exercise, Assignments, and Rolling Trades
Before we get started, let's do a refresher and review the differences between a call or put assignment versus an exercise.
Review of exercise and assignment of puts and calls
The resulting position from an assignment and exercise differs from calls and puts. Remember, assignment is the term to use when you are short an option. Exercise is the term to use when you are long an option.
|Short stock||Long stock||Long stock||Short stock|
Assignments from short options
Your cost basis or proceeds are affected based on your position type. Any commissions or fees from the original trade and assignment fees will also factor in your overall p/l. The cells shaded yellow are affected by an assignment when you are assigned.
|Long stock called away (covered call)^||Original purchase price of the stock||Assigned strike price + premium received|
|Short stock put to cover (covered put)||Assigned strike price + premium received||The original short sale price of the stock|
|Uncovered/Naked call||Total debit paid to close short shares||The total premium received + total proceeds from the short stock sale|
|Uncovered/Naked put^||The total premium received - the cost of the assigned stock. The holding period starts the day the counterparty exercised the option.||Total proceeds from closing long shares.|
Exercising long options
Like an assignment, your cost basis or proceeds are affected based on your position type. Any commissions or fees from the original trade and assignment fees will also factor in your overall p/l.Cells shaded yellow are affected by an exercise.
|Short stock covered (covered call)||Exercise strike price + premium paid||The original short sale of the stock|
|Long stock put to cover (covered put)^||Original purchase price of the stock||Exercise strike price - premium paid|
|Long call^||Premium paid + cost of the stock. The holding period starts on the day the counterparty exercised the option.||Total proceeds from closing long shares.|
|Long put||Total debit paid to close short shares||Proceeds from the short stock sale - premium paid|
Rolls, on the other hand, are a bit different. Even though you may not have closed out of your rolled position, you realize a gain or loss each time you roll. A rolling trade consists of closing a position and realizing a profit or loss, then opening a new position in its place. When you roll a short premium or long premium position, the closing portion of the roll would be a realized loss or profit, which is a taxable event. Even though the position is not closed in your eyes, rolls, by definition, are a taxable event.
Your overall realized profit from a short premium position will only occur if you cover it for less than the total credits received. Conversely, long premium trades can only be realized as an overall profit if sold for more than the total debit paid.