Information on Reporting Options Trades on Tax Return

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How to File Put & Call Options on Tax Returns

You may owe capital gains tax on your option trade proceeds.

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The Internal Revenue Service wants to know if your option trading resulted in a capital gain or loss. When you trade put options, you sell the option first with the goal of making a profit when you buy it back at a lower price. With call options, you buy the option first and make a profit when you sell it at more than the buy price.

You report your completed put and call option transactions to determine if you owe capital gains tax. If you report a loss, you can use that amount to offset any capital gains you might have.

Understanding Options Trading

Because option brokerage firms often do not send trade confirmations, you will need the information included on your monthly brokerage statements. Start by making two lists of your trades in chronological order.

Your option trades are either short-term or long-term transactions. Short-term trades are opened and closed in 12 months or less. Long-term trades are held longer than one year. Comparing the dates when you first opened the trade to when you closed it will determine if it is a short-term or long-term trade.

Reporting Tax for Options Trading

You report your option put and call trades on Internal Revenue Service Form 8949, Sales and Other Dispositions of Capital Assets.

Enter the option’s trading symbol in column A, the date you opened the trade in column B, the date you closed the trade in column C and the gross proceeds in column D. Enter the acquisition cost in column E and the commission amount in column G. Subtract the amount in column E from columns D and G and put that amount in column H. Add up the amounts in column H to get your total net short-term and long-term trade proceeds and find your put and call options capital gains tax.

The net proceeds from trading put and call options calculated on Form 8949 is transferred to Schedule D, Capital Gains and Losses. Transfer the short-term net gain or loss to line 1, 2 or 3 and carry the total down to line 7. Transfer the long term net gain or loss to line 8b, 9 or 10 and carry that total down to line 15. The final step is to add up the amounts on lines 7 and 15 and show the total on line 16. The final amount is transferred to your personal tax return.

State Stock Options Tax Consequences

If you live in a state that has capital gains tax, you must file a state return to report your option put and call trades. You must disclose the net transaction proceeds and pay state tax on any resulting liability. If you itemize your federal deductions, you can deduct the amount of state capital gains tax you paid on Schedule A to help lower your federal tax bill.

Tax Law Updates

As of 2020, ordinary income tax rates are generally lower across the board than in previous years. This can mean lower taxes on short term capital gains and less of a tax advantage for holding on to securities long enough to claim the long term gains rate on them.

How to Report Stock Options on Your Tax Return

Updated for Tax Year 2020

Stock options give you the right to buy shares of a particular stock at a specific price. The tricky part about reporting stock options on your taxes is that there are many different types of options, with varying tax implications.

The underlying principle behind the taxation of stock options is that if you receive income, you will pay tax. Whether that income is considered a capital gain or ordinary income can affect how much tax you owe when you exercise your stock options. There are two main types of stock options: Employer stock options and open market stock options.

Receiving an employer stock option

The two main types of stock options you might receive from your employer are:

  • incentive stock options (also known as statutory or qualified options, or ISOs) and
  • non-qualified stock options (aka non-statutory options or NSOs)

These employer stock options are often awarded at a discount or a fixed price to buy stock in the company. While both types of options are often used as bonus or reward payments to employees, they carry different tax implications.

The good news is that regardless of the type of option you are awarded, you usually won’t face any tax consequences at the time you receive the option. No matter how many statutory or non-statutory stock options you receive, you typically don’t have to report them when you file your taxes until you exercise those options, unless the option is actively traded on an established market or its value can be readily determined. This exception is rare but does happen at times.

Exercising an option

When you exercise an option, you agree to pay the price specified by the option for shares of stock, also called the award, strike, or exercise price. For example, if you exercise the option to buy 100 shares of IBM stock at $150/share, at the time of exercise you’ll effectively exchange your option for 100 shares of IBM stock, and you’ll no longer have the right to buy additional IBM shares at $150/share.

When you exercise an incentive stock option (ISO), there are generally no tax consequences, although you will have to use Form 6251 to determine if you owe any Alternative Minimum Tax (AMT). However, when you exercise a non-statutory stock option (NSO), you’re liable for ordinary income tax on the difference between the price you paid for the stock and the current fair market value.

If you exercise a non-statutory option for IBM at $150/share and the current market value is $160/share, you’ll pay tax on the $10/share difference ($160 – $150 = $10). For example:

  • 100 shares x $150 (award price)/share = $15,000
  • 100 shares x $160 (current market value)/share = $16,000
  • $16,000 – $15,000 = $1,000 taxable income

Since you’ll have to exercise your option through your employer, your employer will report the amount of your income on line 1 of your Form W-2 as ordinary wages or salary and the income will be included when you file your tax return.

Selling stock

When you sell stock you’ve acquired via the exercise of any type of option, you might face additional taxes. Just as if you bought a stock in the open market, if you acquire a stock by exercising an option and then sell it at a higher price, you have a taxable gain. If you satisfy the holding period requirement, by either keeping the stock for 1 year after exercising the option or 2 years after the grant date of the option, you will report a long-term capital gain, which is usually taxed at a lower rate.

If you don’t meet the holding period requirement, your gain is considered short-term and taxable as ordinary income. You should report a long-term gain on Schedule D of Form 1040. A short-term gain will typically appear in box 1 of your W-2 as ordinary income, and you should file it as wages on line 7 of Form 1040.

Open market options

If you buy or sell a stock option in the open market, the taxation rules are similar to options you receive from an employer. When you buy an open-market option, you’re not responsible for reporting any information on your tax return.

However, when you sell an option—or the stock you acquired by exercising the option—you must report the profit or loss on Schedule D of your Form 1040. If you’ve held the stock or option for less than one year, your sale will result in a short-term gain or loss, which will either add to or reduce your ordinary income. Options sold after a one year or longer holding period are considered long-term capital gains or losses.

When you use TurboTax to prepare your taxes, we’ll do these calculations and fill in all the right forms for you. We can even directly import stock transactions from many brokerages and financial institutions, right into your tax return.

From stocks and bonds to rental income, TurboTax Premier helps you get your taxes done right

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    Reporting Options Trades on Tax Return

    A common questions that arises once traders beginning winning many successful binary trades is “how do I report my winnings on my tax return?”. Of course there isn’t a one size fits all answer to that question. Taxes on options trading range from a simple declaration of earnings to something a bit more complicated. The local tax laws in your country of residence, how your country of residence views options, and how much money you’ve won or lost will all affect how your proceed in reporting your taxes.

    What difference does make how my country regulates binary options?

    Generally binary options are regulated in one of two ways. They are either regulated through a financial regulator as is the case in Cyprus, or they are regulated by a gaming authority as is the case in UK. This distinction is important to understand when filing your taxes.

    For more information on regulation of different platforms check out our a regulation page.

    The reason this is important is because most countries tax earnings from gambling or trading in different ways. For example the UK tax on capital gains is between 18%-28%. However, the tax on income from gaming revenue is much different.

    Once you know how binary options are regulated in your country, you can figure out how to designate your winnings or your tax return. Some countries have different procedures and forms you need to fill our. Some countries allow you to report taxes on options trading with your general income.

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    Reporting options trades on your tax return can get complicated. If you are unsure how to proceed, it is always best to contact a tax professional for assistance.

    Below are some tips and hints for reporting options trading taxes depending on your country of residence..

    Canadian Taxes on Options Trading

    All residents of Canada are required by law to file a tax return regardless of how much you earned that year or where the income came from. Binary platforms do not withhold taxes on your behalf so it is your responsibility to manage your winnings and losses for the purpose of declaring them on your taxes at the end of the year. In Canada earnings from options trading can be taxed as capital gains. The important thing is to maintain an organized record of your winnings and losses so you know how much loss you can deduct from your winnings.

    In order to be confident that you are properly declaring your taxes, it is strongly recommend that you review the Canadian Revenue Agency (CRA) website along with the tax authority in your local province. If you have any doubt, be sure to contact a tax professional for assistance.

    Australian Taxes on Options Trading

    If you are a trader residing in Australia, you will most likely be able to file your winnings under capital gains and earnings. Australia does not classify binary options under a gaming tax. However, how exactly your declare your earnings depends on how much you’ve earned trading throughout the year. If you’ve earned a smaller amount, you can file it under extra earnings. For larger amounts you might need to list them under capital gains.

    Your specific tax liability will depend on how much you traded throughout the year. The upper limit of earnings you are allowed to declare as extra earnings will change from state to state. It is best practice to check both federal and state level tax requirements before you begin trading. This you will know the various relevant levels of earning as well as how the country views losses (i.e. are they deductible or not).

    For more specific information on the federal level review the Australian Taxation Office. The ATO site provides relevant information as well as links to the various local tax authorities. Be sure to contact a tax professional in Australia if you are unsure of how to file trading taxes.

    UK Taxes on Options Trading

    UK tax code is unclear when it comes to binary options trading. In general, binary options are considered gaming, although that is liable to change in the near future. As such taxes on winnings from binary options would fall under the tax code that incorporates gaming. However, depending on your winnings you may not have to pay anything. It is recommend that you consult with Her Majesties Revenue and Commissions before you begin trading binary options in the UK.

    US Taxes on Options Trading

    If you are planning on trading binary options in the US, filing your taxes can get very murky very quickly consider the confusion surrounding regulation of the financial instrument as well as the necessity to file income taxes at both the federal and state level. It is best practice to consult with the relevant regulatory bodies to determine if options are considered capital gains or gaming earnings.

    If you are able to report binary options as capital gains then your tax rate on this income will be between 0%-28% depending on your normal rate of income. The more normal income you bring in per year, the more taxes you will pay on capital gains (capital gains can also be broken into long term and short term which has a bearing on the amount of taxes you pay). If you are required to report earnings from binary options as gaming then you need to include it in your general income which is taxed at the same rate as your salary.

    The downside of having to report trading as gaming is that you can’t report losses as deductions below zero. What this means is that if you win $100 dollars but lost $50 all you need to do is claim your total winnings as $50. But, if you win $100 but lose $150, you cannot deduct $50 from your total income from that year.

    Your best options is to consult the Internal Revenue Service (IRS) as well as your local tax authority website as well as a tax professional to help you navigate the tax code.

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