Taxes for option sellers

Premium is not one kind of income. Depending on whether the contract expired, was assigned or was exercised, the same dollar is a standalone short-term gain, a reduction in the cost of shares you bought, or an increase in what you sold shares for. Four articles below, all of them running the arithmetic on one year of one account.

• The wash sale rule and option sellingSell shares at a loss and get assigned on a put eight days later and the loss is disallowed, moving into the basis of the new shares. Worked on a real position down to the cent, with the one case Publication 550 does not resolve named as unresolved.
• Capital gains on assigned sharesBoth call-aways in a worked year were held 92 days, so both were short term. The clock on assigned shares starts the day after assignment, expired premium is short term regardless of how long the contract ran, and the year cost 26.8 percent of its own profit in tax.
• Cost basis after assignmentA put assigned at $22.50 with a $0.43 credit gives a basis of $22.07, and the $211 of covered call premium collected afterwards does not reduce it further. The two rules from Publication 550 Table 4-3, and the $588 error that comes from applying them to your performance ledger.
• Section 1256 and index optionsBroad-based index options get 60/40 treatment, worth 10.2 percentage points of the premium against an equity option at the same rate. One cash-secured index put secures $555,000, which is eleven times a $50,000 account, so the edge exists and the account cannot get to it.

Read them in this order

Cost basis first, because every other page measures from it. Then the holding period, which is why nearly everything a premium seller does is short term. Then the wash sale rule, which is the one that catches people running the wheel. Section 1256 is last because it is the only page here about a contract most small accounts cannot reach.

One account, four articles

The same illustrative year as the risk series: $50,000 in cash, six names, 46 trades, $4,598 of premium, five assignments and two call-aways. Both positions that were called away were held 92 days, so both were short term. The whole year's taxable gain worked out to $6,003 and the bill at an assumed 32 percent rate was $1,921, which is 26.8 percent of the account's profit.

What this series will not tell you

Your answer. These pages quote IRS Publication 550 by page number and show the arithmetic on a worked position, which is as far as a web page should go. Tax rates appear as stated assumptions of the examples and never as claims about the code, and no bracket thresholds are published anywhere in the series, because they change and they depend on facts about you.

It also will not resolve whether writing a put on a name you just sold at a loss is a wash sale. The publication's list names acquiring an option to buy, a writer grants one rather than acquiring one, and the case is not addressed. That page says so instead of picking a side.

And it will not explain how the OptionsKing confidence score is computed. Tax rules are public documents and belong in public. What the engine does stays private: the score feeds a ranking and the app shows you the highest-ranked handful of what it found, and how it works covers what that guarantees.

Questions people actually ask

Run your own numbers

• Wheel strategy calculator the full cycle these basis rules apply to.
• Covered call calculator break-even before tax, which is the number these pages adjust.
• Cash-secured put calculator the credit that becomes a basis reduction on assignment.
• Running the book the ledger that has to reconcile to all of this.