Are gains on options held more than one year long term?

Let's say you purchase a call option.  Several things can happen
including


   i) you later sell it -- the holding period determines
      if this is long term or short term.


   ii)  The call expires worthless -- the treatment is the same as
         above assuming it was sold on the expiration date for $0.

  iii) You exercise the call --  in that case the option premium
      you paid is part of the eventual gain or loss when you
      sell the underlying security and the acquisition date of
      the security determines the holding period.


Put options are similar, but see IRS Publication 550 for details
on handling equity options.
--


ArtKamlet  at  a o l dot c o m  Columbus OH  K2PZH

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It doesn't make sense that the acquisition date of the security
determines the holding period.  Say you bought a call that expires in
two years at $5 each.  Just before your options expire, two years
later, your call is in the money and each option is worth $25, or
$2,500 for one contract.  If you sell now, you have long term gains of
$20 per option, taxed at 15%.  But suppose you exercise the options,
and then own the corresponding shares.  If you decide to sell right
away, you still have a gain of $2,500 per 100 shares.  Except now your
gain is short term, and taxed at say 33%.  This does not make sense to
me, as both are fundamentally the same thing.

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See page 57, first paragraph on that page, which tells you to use the
dates of the underlying security when you exercise an option.

http://www.irs.gov/pub/irs-pdf/p550.pdf


And where did you ever learn that tax regulations are supposed to
make sense?
--


ArtKamlet  at  a o l dot c o m  Columbus OH  K2PZH

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Certainly not on MTM!

Dick

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