How to deduct losses and gains on option straddles on Schedule D?

Question

Hi, I did a lot of vertical call and put option spreads last year. It was the first year I dealt with options. And I have never done taxes for them before. Can anyone show me how to report them on Schedule D? Can anyone give me a practical example? No tax advisor where I live now has ever dealt with options. They give me a confused look when I ask them for help. So I figured I have to do this myself. I've done some research on google. I found form 6781 that I need to use in order to report them. But I am still a little confused with whether or not wash out rules apply to option straddles and how to deal with losses (do they get carried over to next year?) Please help me if anyone knows how! Thank you!

Answer 1

Don't play the game if you don't know the rules. Because you don't know the first thing about reporting for taxes, you will have to pay extra to whomever does your taxes because it will take extra time to clean up after your mess.



Frankly, my typing speed isn't high enough to give a complete answer. This is the wrong time of year for me to spend a lot of time answering a question for free.



You need to make certain that you report all sales that are on a Form 1099-B so you don't trigger a letter from the IRS next year. If a "sale" is part of a trade that didn't complete until 2010, you have to report the "sale" portion and put the same amount as your cost basis.



I found a couple of sites that give an explanation:



http://www.armencomp.com/tax-topics/options



http://www.smartmoney.com/personal-finance/taxes/taxes-on-options-151-puts-and-calls-9537/



I hope this helps.

Gary

Answer 2

A straddle is not subject to the loss deferral rules for straddles if both of the following are true.

1.All of the offsetting positions consist of one or more qualified covered call options and the stock to be purchased from you under the options.



2.The straddle is not part of a larger straddle.



Report each position (whether or not it is part of a straddle) on which you have unrecognized gain at the end of the tax year and the amount of this unrecognized gain in Part III of Form 6781. Use Part II of Form 6781 to figure your gains and losses on straddles before entering these amounts on Schedule D (Form 1040). Include a copy of Form 6781 with your income tax return.



About the wash sale rule, the following links can give your a detailed demonstration:

http://www.itrademax.com/ipress/detailed-instructions/run-reports/wash-sales-calculation-rule.htm



http://www.irs.gov/publications/p550/ch04.html#en_US_publink100010632

Answer 3

Dear Nata: This is a very advanced type of brokerage play and I would suggest calling your local tax chains and get an EA experienced in trades.



Form 6781 is straight forward but I have only seen it in a training environment.



This advice was prepared based on our understanding of the tax law in effect at the time it was written as it applies to the facts that you provided. Click on my profile to read more. Errol Quinn Enrolled Agent

Answer 4

Your broker will keep track of everything and send all the tax forms you need in January. Be sure you learn the difference between short term and long term. The IRS doesn't "take out" anything. The employer or bank or broker take out what you tell them to. (There are some cases of mandatory withholding but it still isn't the IRS that takes out the money.)