Tax Implications of Stock Assignment Vs. Options

The IRS treats income from options as capital gains.
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The rule for stock options is that long positions can exercise but short positions can be assigned. The long position belongs to the option buyer, who has the right but not the obligation, to buy or sell 100 shares of an underlying stock at a set price -- the strike price -- on or before an expiration date. The Internal Revenue Service has special rules for taxing option assignments.

Non-Assignment OptionsTaxation

The short position belongs to the options writer. She can sell a put or call and collect a premium from the buyer. Her most profitable outcome is for the option to expire as worthless, because she books the entire premium as a short-term capital gain. She can also choose to offset her short position before expiration by buying an identical option: The two cancel each other and close out her position. The difference between her original premium and the price of the offsetting purchase is a short-term capital gain or loss. As in all option trades, she subtracts commissions from her proceeds to reduce her profit or increase her loss.

Short Call Assignment

When a buyer exercises a call, he purchases shares from a random call seller chosen by the Options Clearing Corporation. The seller receives the assignment notice and must fork over 100 shares of the underlying stock. She may have to buy the shares on the spot, but if she wrote a “covered” call she already has the shares in her portfolio. She figures her gain or loss by adding the original premium to the strike price and then subtracting her cost of the underlying shares. Her gain or loss is short-term unless she held the underlying shares for more than a year before selling the call, in which case it qualifies for long-term capital gains rates.

Short Put Assignment

A put owner can exercise his option before expiration. If the put writer is assigned, she will have to purchase 100 shares of the underlying stock at the strike price. In this case, she waits to pay tax on the premium she received when she sold the put until she eventually sells the 100 shares assigned to her. At that sale, she adds the original put premium to the share proceeds and subtracts the strike price. The capital gain or loss is long-term if she holds the assigned shares for more than a year before selling them.

2013 Capital Gains Rates

Your short-term capital gains rate is your marginal bracket -- the tax on your “last dollar” of annual income. The highest long-term capital gains rate is 20 percent, which applies to individuals with modified adjusted gross income exceeding $400,000 or couples filing jointly with more than $450,000 in MAGI. For those with less income, the rate is 15 percent for taxpayers in a 25 percent or higher bracket. For everyone else, the long-term gain is tax-free. You use capital losses to offset capital gains and up to $3,000 a year of ordinary income. You can carry over excess capital losses to future tax years.

2013 Medicare Surcharge

A Medicare 3.8 percent surcharge applies to individuals with MAGI exceeding $200,000 and couples with more than $250,000 in MAGI. The IRS applies the tax on the lesser of investment income and the amount by which MAGI exceeds the noted thresholds. Investment income includes capital gains unless they are shielded in an individual retirement arrangement.

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