Tax Treatment for Exercise, Assignments, and Rolling Trades

Booking profits or losses from buying to close a short positions or selling to close a long positions is pretty straightforward, but how is it treated when you exercise an option or if you happen to be assigned? Options can be complicated, but add tax treatment to it, and you wind up with one complicated cocktail. That’s why we’ve broken it down since it’s not so “black & white.” 


Review of exercise and assignment of puts and calls.

AssignmentExercise
CallsPutsCallsPuts
Short stockLong stockLong stockShort stock


Assignments from short options


Tax Treatment
Long stock called away (covered call)^Exercise Price + Premium Received* - Original purchase price of the stock
Long stock put to cover (covered put)Short sale price - Exercise Price + Premium Received
Uncovered callNet proceeds: Premium received* + proceeds from the short stock sold
Uncovered putBasis: Premium received* - exercise strike price of the put. Holding period starts the day after the option was exercised by the counterparty.


Exercising long options


Tax Treatment
Long stock called away (covered call)^Exercise Price + Premium Received* - Original purchase price of the stock
Long stock put to cover (covered put)Short sale price - Exercise Price + Premium Received
Uncovered callNet proceeds: Premium received* + proceeds from the short stock sold
Uncovered putBasis: Premium received* - exercise strike price of the put. Holding period starts the day after the option was exercised by the counterparty.
*Premium collected from a short equity options position is treated as short-term capital gains.
^Tax treatment on equity position is based on your holding period (i.e. short-term or long-term).

Rolling Trades

Rolls, on the other hand, are a bit different. Even though you may not have closed out of your rolled position, you realize a gain or loss when rolling. By definition, a roll consists of closing a position then opening a new position. When you roll a short premium or long premium position, the closing portion of the roll would be a realized loss or profit, which is a taxable event. Even though the entire position is not closed, rolls, by definition, consist of a closing order and an opening order. Any gains or losses realized from a roll is reported and realized.

Your overall realized profit from a short premium position will only occur if you can purchase it back for less than the total credits received. Conversely, any realized profit from a long premium trade can only be realized for a gain if it is sold for more than what it was purchased for.