I am not really understanding how US tax works in terms of option contracts that I sell. Let's say I sell a call option for $100, expiration is next year (more than 1 year), so I get $100 in my pocket this year, assuming the contract does not get exercised this year, I still have my $100, I should have to pay tax for the $100 at ordinary income rate for this tax year. But, it is also possible that next year, I buy the contract back at a lower price, say, $90, so my gain is just $10, plus, its been more than a year, I should be paying long term cap gain rate of $10 only… so anybody had tried this? do you pay the tax for the $100 this year? or the $10 next year? or you pay first then get a refund later? or you don't get a refund at all? Oh, what happens if the contract does get exercised this year.. I assume that's the easy case I just pay tax on the $100?
Posted by fltcpt
2 Comments
No the $100 is unrealized until expiration. You book the $100 as a short term gain if it expires worthless; if it exercises and you lose the stock you add the $100 to the sale proceeds of the stock.
All options written/covered are short-term gains because all shorts are ST gains- you hold the contract instantaneously when you buy it back and match it against the short.