Call and Put Options

Call options (calls) are contracts on particular stocks and indices (such as the S&P 500) that allow them to benefit from price increases within a fixed amount of time. If the stock or index does not go up within that time frame, the option expires worthless and the holder can deduct that loss on Schedule D, Form 1040. Put options (puts) work in the opposite way, allowing investors to benefit from declines. Those with large portfolios may also sell options without having owned the stock to back them up, which can lead to outsized gains and losses.

Offsetting Gains

Investors may purposely choose to take losses on options positions to offset gains elsewhere and reduce their capital gains tax burden. They may also hope a particular option expires worthless, thus providing the tax deduction while reflecting a larger profit on the underlying stock. As the capital gains tax takes a chunk of the gains, especially for trades concluded within a one-year time frame, investors must carefully consider the tax ramifications for each trade as part of a disciplined, long-term investment plan.

Tax-Loss Limits

References

Resources

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