Option Contracts and Taxes?

Question

How do I account for Option Contract trades for Tax purposes?

I had a number of options trades (calls and puts) last year resulting in a small loss. My broker sent me a "2006 Supplemental Tax Info - Non-Reportable" form so none of this activity shows up on a 1099-B. TurboTax has a form 6781 that is called "Section1256 Contracts and Straddles" but there are no examples that I can find on how to fill it out.

Is form 6781 the correct form or should I use schedule D?
Are there any examples available?

Thanks in advance.

Answer 1

Form 6781 is only used if you had Section 1256 contracts or what the IRS calls a straddle.

For a privite investor, the only Section 1256 contracts you are likely to have traded would be cash settled options on a broad based index, such as SPX or OEX options.

The IRS defines a straddle as "any set of offsetting positions on personal property." That includes not only what option traders define as straddles, but most other spreads as well, including vertical spreads and time spreads. The only offsetting positions including at least one option position that the IRS does not consider a straddle is a "qualified covered call." If you had any covered calls see page 59 or IRS publication 550 to determine if the covered call was qualified or not.

If an option trade was not a Section 1256 contract and was not part of a straddle, report it on Schedule D (for the year the trades was closed) unless the postion was closed through the exercise or assignment process. If you exercised a long option position or were assigned a short option position, adjust the price of the underlying by the amount of the option premium instead of reporting the option trade separately.

Answer 2

option contracts taxes

Answer 3

Use Schedule D and show them as short term trades. Sounds like you know your loss so examples are unnecessary.