How to Report Proceeds Received from Selling Calls for Year 2007?

Question

Hi,
I just sold some call options for January 2007. On 12-31-06, the calls will still be in my stock portfolio. They will either be assigned in Jan 2007 (meaning that I will end up buying the underlying stocks at the option price) or they will become worthless and expire. I wonder if I am supposed to report the gain (the money I got in 2006 for selling these calls) in 2006 tax return or should I wait till 2007 and report it in 2007 return.
Thanks in advance for the answer.
Best regards,
Shahid

Answer 1

I copied an answer from the IRS. It looks to me that you report the transaction when the option is closed. This could occur when the are exercised or expire.

Writers of calls and puts. If you write (grant) a call or a put, do not include the amount you receive for writing it in your income at the time of receipt. Carry it in a deferred account until:

1.

Your obligation expires,
2.

You sell, in the case of a call, or buy, in the case of a put, the underlying stock when the option is exercised, or
3.

You engage in a closing transaction.

If your obligation expires, the amount you received for writing the call or put is short-term capital gain.

If a call you write is exercised and you sell the underlying stock, increase your amount realized on the sale of the stock by the amount you received for the call when figuring your gain or loss. The gain or loss is long term or short term depending on your holding period of the stock.

If a put you write is exercised and you buy the underlying stock, decrease your basis in the stock by the amount you received for the put. Your holding period for the stock begins on the date you buy it, not on the date you wrote the put.

If you enter into a closing transaction by paying an amount equal to the value of the call or put at the time of the payment, the difference between the amount you pay and the amount you receive for the call or put is a short-term capital gain or loss.

Answer 2

I am an active option trader. The second poster is right. You report the transaction for the year it is finished. So you sell a call in 2006. If it isn't assigned in '06 it carries into 2007. If you buy it back you put the sell price minus commission is the price sold on Schedule D. You put the purchase price plus commission you closed with on the purchase price column. The chronology of the dates will be reversed of normal stock transactions but like short sales. The sell date is earlier than the purchase date. If you don't close it and it expires you simply put 'expired' in the purchase column with the date it expired in the purchase date column. So, in the case you describe, you will pay capital gains on your 2007 taxes. In a covered call, or spread where you are called out of the stock or long call you will capture the stock or call and the sold call separately.

Answer 3

If it was done in 2006 it needs to be filed in 2006