Oracle Stock

[LikeWaah]

To elaborate:

Let's say you own stock with a large built in gain... Your tax basis is $1, its FMV is $20. Your unrealized gain is $19 and not subject to tax until you realize that gain by selling the stock, for example.

If you buy a put at $20 (an option to sell at $20) you have effectively locked in that gain. If the stock loses value you can exercise your put and sell at $20.

If the stock appreciates, and your put option becomes worthless, you will still be considered to have recognized the $19 of gain, which will be added to your tax basis going forward. If the issue tanks below $20 later, the wash rules may suspend your losses. Messy.

The IRS considers the purchase of that put option as a taxable disposition, triggering $19 of taxable gain, even though you did not actually sell anything.

In either case, you generated a tax liability as though you sold property at a gain, without enjoying any proceeds (i.e., cash) from an actual sale!

IANAA, but I don't think you'll generate a tax liability just for purchasing puts. If you sell your puts for a gain, then the gains on that trade are taxable. If you sell your puts for a loss or they expire, then the losses can be claimed. Only if you decide to exercise your options and you sell at the strike price, then you will be liable for the realized gain on that trade.

So if I understand correctly, you will not trigger a tax liability until you realize the $19 gain. Though, if you sell your purchased options at a profit, you will have to pay taxes on those gains.

 

[channelcat]

I got a gob of my retirement $$$ in reits, which have dumped mightily. I didn't realize that QE started in 2008. I'm holding. BX appears to be trudging back to its $31 IPO price.
Larrys' a nitwit who made good anyway. ever blow off a day of work to go riding, cause you can? welll...maybe the sting of recognition?
now, these beyond asshat lane hogging bicycle riders...

 

[Owensdad]

IANAA, but I don't think you'll generate a tax liability just for purchasing puts. If you sell your puts for a gain, then the gains on that trade are taxable. If you sell your puts for a loss or they expire, then the losses can be claimed. Only if you decide to exercise your options and you sell at the strike price, then you will be liable for the realized gain on that trade.

So if I understand correctly, you will not trigger a tax liability until you realize the $19 gain. Though, if you sell your purchased options at a profit, you will have to pay taxes on those gains.

Wrong.

Buying puts with respect to an underlying appreciated position is a constructive sale of the underlying.

That this treatment is not intuitive is what makes it a "trap". Although if you think about it, it makes perfect sense.

See IRC sec. 1259 and IRS publication 550.

 

[channelcat]

Oracle IS stable, but the dividend growth rate is not impressive.

 

[channelcat]

Correction. BX IPO was $35. JMHO, a WAY better investment than ORCL JMHO

 

[chickwebb]

Buying puts with respect to an underlying appreciated position is a constructive sale of the underlying.

That this treatment is not intuitive is what makes it a "trap". Although if you think about it, it makes perfect sense.

See IRC sec. 1259 and IRS publication 550.

Shit, he's right. Page 39, "Constructive Sales of Appreciated Financial Positions". That could be a bitch.

 

[chickwebb]

Meh common stock, Larry gives me RSU's muahahahhahahaa boolsheit

I have options from when I started my current gig and the first few years there, but they switched to RSU's when the IRS changed the tax treatment of options.

The problem with options, of course, is that they're granted at the current price of the stock, so they can be worthless (aka, "under water"). As they generally expire 10 years after the grant date, this means you might never get anything from them. But, you get to choose when you exercise them, so you have control over when you realize the income (and capital gain).

RSU's, as somebody noted, have no value when they are granted. The problem with RSU's, though, is that they vest on a schedule - typically 1/4 of the grant each year, starting a year after the grant - and when they vest, the value of the grant on the vesting date is REGULAR INCOME. For me this means that every April I now have 4 separate grants (1/4 of each of the previous 4 years grants) vesting over the course of a week or so, and my income has jumped in a way that I cannot control as a result. The broker is required to sell some of the shares in order to pay the normal payroll taxes on the grant so I don't have to deal with estimated payments. But, this has pushed me up into the next tax bracket and I'm not happy about it.

As far as I know the only way to avoid this is to do a "Special Tax 83(b)" election, but then you have to pay taxes on the grant date based on the price on that date - so I'll be paying the tax out of my other income - AND if you never vest the grant, you don't get the taxes you paid back. That would be teh suck. So, it's risky and I'm not sure I want to go there.

 

[afm199]

Wrong.

Buying puts with respect to an underlying appreciated position is a constructive sale of the underlying.

That this treatment is not intuitive is what makes it a "trap". Although if you think about it, it makes perfect sense.
Typical
See IRC sec. 1259 and IRS publication 550.

Typically a broker will exercise expiring in the money options
Ooo

 

[chickwebb]

Typically a broker will exercise expiring in the money options

True. The trap, as I understand it though, is that the very act of purchasing the put creates a taxable gain. So, even if the option expires out of the money, you will owe taxes on the unrealized capital gain of the underlying position. That could be a significant liability, depending on the number of shares, the size of the unrealized gain, and how long you've held the stock. Plus you lost whatever you paid for the puts when they expire out of the money (but of course you get to write down your gains by that amount, so it doesn't hurt quite so bad).

Somebody chime in if I got this wrong. I confess I'm no expert, and this is a wrinkle I wasn't aware of previously, so I may not be groking this completely.

 

[Owensdad]

True. The trap, as I understand it though, is that the very act of purchasing the put creates a taxable gain.

Correct.

 

[mercurial]

I believe you can sell out of the money calls and it won't constitute a constructive sale. Of course it's not a perfect hedge, either. It's more like you are buying a dividend at the price of capital appreciation.

 

[Owensdad]

I believe you can sell out of the money calls and it won't constitute a constructive sale.

Agree (did not follow the dividend equivalency point though). However, *buying* an option to sell would create a constructive sale if you had an appreciated short position of the same underlying.

The point being if your option purchase locks in your unrealized gain, you will be treated as realizing that gain.

Another wrinkle is that selling options at a loss when you also own the underlying may trigger the wash sale rules.

Due care is required.

 

[chickwebb]

I believe you can sell out of the money calls and it won't constitute a constructive sale. Of course it's not a perfect hedge, either. It's more like you are buying a dividend at the price of capital appreciation.

Yeah, I used to do covered call sales when the stock was flat until the company banned all options activities on the our stock. I protested that this was counterproductive on the basis that it actually discouraged employees from holding the stock, and suggested that instead they prohibit only short positions, but that fell on deaf ears. So now I'm a lot more aggressive about taking money off the table when it goes up.