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Let's take these hypothetical trades

  • On 08/01/2020: Bought AAPL Jan-2022 100C at $30 (Long call)
  • On 08/30/2020: Sold AAPL Jan-2022 110C at $50 (Short Call). By this date, 08/30/2020, before my short call sale, my long call was $55 in value. In other words, I had unrealized gains on my long call ($100 Strike).

Through Dec-31-2020 I continue to hold both the positions.

  1. Do I have to pay taxes in my 2020 filing seeing this as constructive sale?
  2. If yes, what if the expiry dates are different rather than being the same?
  3. Again, if yes, would a significant difference between the strikes of long and short calls make it to be a not constructive sale?

I thought Downside protection and upside limitation influence whether this would be considered a constructive sale. I am avoiding the downside risk through the short call. On the upside, technically I am not giving up the upside. At expiry AAPL might close above $110+$50=$160. And my final gain is $30+$10. Does this make it appropriate to be reported in 2022 taxes, rather than 2020 taxes?

Chris W. Rea
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C K
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1 Answers1

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Option tax law is contradictory and not well defined so I'll take a pass on the issue of constructive sales. So I'll just comment on the trade.

You wrote that it's a hypothetical trade. You made these numbers up for the purpose of discussing the constructive sale? (The premiums aren't realistic).

I am avoiding the downside risk through the short call. On the upside, technically I am not giving up the upside.

Converting a long call to a vertical spread is indeed "giving up the upside". Selling the $110 call gave up all but $5 of the upside.

At expiry AAPL might close above $110+$50=$160. And my final gain is $30+$10.

Before you converted the $100c to a vertical, you had a $25 gain on it. By selling the $110c, you mitigated $50 of that $55 risk and the worst that could happen would be giving back only $5.

You made an error on your profit calculation. You paid $30 for your 100c and sold your 110c for $50. That's a $20 credit. The spread has the potential to make $10 so you maximum profit is $30 (not $40).

Summary? When you had a $25 gain, you converted to a spread that has $5 of risk and $5 of gain and the expiration is January of 2022. I don't see 15 months for $5 as worthwhile.

Bob Baerker
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  • Thank you @Bob! You are right, I shared hypothetical numbers. My primary concern was with the constructive sale. – C K Oct 12 '20 at 03:39
  • My primary concern was with the constructive sale. As the share price kept moving up, I kept cashing out by writing vertical spread, and used the cash to but another call at strike close to the latest share price. I did this multiple times as the share price saw a significant ride up. "$5 of risk and $5 of gain and the expiration is January of 2022". The reason I did this was to move the cash to options that were giving me better leverage (x% move in option price for each 1% move in the stock price), keeping taxes LTCG while at it. Selling the original/hypothetical call above would mean STCG. – C K Oct 12 '20 at 03:45