Topic Number - Stock Options If you receive an option to buy stock as payment for your services, you may have income when you receive the option, when you exercise the option, or when you dispose of the option or stock received when you exercise the option. On line 2, enter a description of the property in column a.
If you meet the holding period requirement: You can generally treat the sale of stock as giving rise to capital gain or loss. You may have ordinary income if the option price was below the stock's fair market value FMV at the time the option was granted. If you don't meet the holding period requirement: The ordinary income that you should report in the year of the sale is the amount by which the FMV of the stock at the time of purchase or vesting, if later exceeds the exercise price.
Treat any additional gain or loss as capital gain or loss. If you meet the holding period requirement but the option exercise price is below the FMV of the stock at the time the option was granted: You report as ordinary income wages on line 7 of Form , U. Individual Income Tax Return , the lesser of 1 the amount by which the stock's FMV on the date of grant exceeds the option price or 2 the amount by which the stock's FMV on the date of sale or other disposition exceeds the option price.
Your employer should report the ordinary income to you as wages in box 1 of Form W-2 , Wage and Tax Statement. If your employer or former employer doesn't provide you with a Form W-2, or if the Form W-2 doesn't include the income in box 1, you must still report the income as wages on line 7 of Form for the year of sale or other disposition.
If your gain is more than the amount you report as ordinary income, the remainder is a capital gain reported on Schedule D Form and, if required, on Form Publication , Basis of Assets. Publication , Taxable and Nontaxable Income. Capital Gains, Losses, and Sale of Home. The break-even point is the stock purchase price minus the net of the call option price and the put option price. The percent maximum loss is the difference between the break-even price and the strike price of the purchased put option divided by the net investment, for example for JKH:.
The naked put is a neutral-to-bullish strategy and consists of selling a put option against a stock. The naked put generally requires less in brokerage fees and commissions than the covered call. The following return calculation assumes the sold put option is out-of-the-money and the price of the stock at expiration is greater than the put strike price at option expiration:. The calendar call spread see calendar spread is a bullish strategy and consists of selling a put option with a shorter expiration against a purchased call option with an expiration further out in time.
The calendar call spread is basically a leveraged version of the covered call see above , but purchasing long call options instead of purchasing stock. The long straddle see straddle is a bullish and a bearish strategy and consists of purchasing a put option and a call option with the same strike prices and expiration.
The long straddle is profitable if the underlying stock or index makes a movement upward or downward offsetting the initial combined purchase price of the options.
A long straddle becomes profitable if the stock or index moves more than the combined purchase prices of the options away from the strike price of the options. The iron butterfly is a neutral strategy and consists of a combination of a bull put credit spread and a bear call credit spread see above. The iron butterfly is a special case of an iron condor see above where the strike price for the bull put credit spread and the bear call credit spread are the same.
Ideally, the margin for the iron butterfly is the maximum of the bull put and bear call spreads, but some brokers require a cumulative margin for the bull put and the bear call.
For nonstatutory options without a readily determinable fair market value, there's no taxable event when the option is granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option.
You have taxable income or deductible loss when you sell the stock you received by exercising the option. For specific information and reporting requirements, refer to Publication For you and your family. Individuals abroad and more. EINs and other information. Get Your Tax Record. Bank Account Direct Pay. Debit or Credit Card. Payment Plan Installment Agreement. Standard mileage and other information. Instructions for Form Request for Transcript of Tax Return.
Employee's Withholding Allowance Certificate. Employer's Quarterly Federal Tax Return.