If you trade options, you must keep accurate records of your transactions. The Internal Revenue Service requires a full accounting of all trades that have closed during the tax year. You must be able to document the amount you paid or received for each trade and whether you wrote, bought or exercised an option.
1. Enter the description in Column A, Part I of Schedule D if your trade closed within one year. Use Part II if your trade was open for more than one year. For the description, use the option ticker symbol and the number of contracts; this information should be reported on your brokerage account statement. If you are the option writer, you don't report the option trade unless you buy back the option.
2. Enter the date you bought the option in Column B. If you purchased the option outright, report the date of the purchase here. If you wrote the option and then bought it back to close the trade, enter the date you closed the trade on this line.
3. Enter the date of sale in Column C. This is the date you sold an option that you bought -- it must be within one year of the date of purchase for Part I; otherwise, enter the information in Part II. If you wrote the option and bought it back, report the date of the opening transaction in Column C.
4. Subtract the transaction cost from the amount of money you realized by selling an option and enter the total in Column D. This is your gain on the sale of an option that you previously bought, or by writing the option (if you later bought it back).
5. Enter the cost of the option in Column E. This is the price you paid for the option if you "went long," or the price you paid in closing out an option that you wrote. Add transaction costs.
6. Add up the short-term gains from this form and any additional trades you entered on Form D1. Enter the result on Line 7, Column F. The process is similar for long-term gains and losses entered in Part II. Combine the totals as instructed on the reverse side of the form and then enter on Form 1040.
- If you write a put option and your option is exercised, you must buy the stock according to the contract details. You reduce the basis of the stock by the amount you collected for the option premium.
- If you write a call option that is exercised, then you must sell the underlying stock. Add the premium for the option to the amount of money you collected for the stock and treat as a long- or short-term gain, depending on the length of time you held the stock.
- If you engage in option combinations such as straddles or butterflies, consult with a tax professional who is familiar with IRS rules for options. At the least, ask him to check your figures against your account statements to verify your accuracy.
- Brokers do not report option trades on Form 1099, so it is your sole responsibility to maintain accurate records for tax reporting. Use tax software to keep track of your trades and to fill out the tax forms correctly.
Items you will need
- Broker account statements
- IRS Form 1040
- IRS Schedule D (Capital Gains and Losses)
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