Tax software straddles

Learn more about these contracts and how they should properly be reported to the IRS in this post. To do so, Section requires that these contracts be reported using mark-to-market rules. You might hold Section contracts at the end of the year. This applies even though you still owned the contracts. This applies no matter how long you held the contracts. When the Section contract ends, the gain or loss is adjusted for the previous gain or loss.

A straddle is when you hold contracts that offset the risk of loss from each other. You might realize a loss when you sell part of a straddle position.

If so, you must reduce your loss by any recognized gain in the offsetting position. Accurately estimate tax liabilities including federal income tax, AMT, and captial gains and measure the value of your tax reduction ideas.

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The loss is deferred and may be taken when the gain on the shares is recognized. The determination of whether the loss is deferred is made at the end of the year. The loss is deferred on the expired protective put to the extent of the unrecognized gain in TEVA as of year-end. Whether the recognized loss is long-term or short-term is based upon how long the trader held the stock holding period before purchasing the protective put.

So, specifically with regard to Example 2, if the trader had held TEVA for more than one year, the capital loss would be long-term, otherwise it would be short-term. If some shares were held long-term and others short-term, presumably the recognized loss would bear that same percentage. If the put expires worthless, and the stock has decreased in price, but not to the put strike, the trader presumably will not be able to recognize the loss on the put expiration but will have to add the cost of the put to the adjusted cost basis of the stock.

Which then begs the question, what if a subsequent put is purchased as a substitute for the original put? Therefore, subject to the offsetting position rules above, it would qualify for capital loss treatment. A married put is also exempt from the short sale rules. Remember that the IRS defines a straddle as the holding of personal property in such a way that risk of loss is substantially reduced.

Also, for offsetting position purposes, stock and options are considered personal property. Thus, losses are deferred on straddle positions. A qualified covered call is not subject to these loss deferral rules.

How can a covered call be subject to these rules anyway? It is an income strategy but the covered call can be sold so deep in the money DITM that it substantially reduces the risk of loss. A qualified covered call generally must:. What is the definition of deep in-the-money option? There are special rules for various stock prices and option expirations according to IRC Sec c 4 D.