This is something I'll be needing to look more in depth into next year as I'm doing the same.
My best guess is that it'll be income tax as an option isn't really a long term asset like a share (which represents a portion of ownership of a company).
An option has an expiry date and, quite frequently, what you're buying, or selling, won't even exist in the future, often less than 30 days into the future.
Other complications will need to be ironed out as there are three things that can happen:
- You trade out of the position at a profit, or loss, which I imagine will impact your income tax due;
- It expires out of the money, in which case you keep the entire premium received (if you sold the option) or loss the entire premium paid (if you bought the option). Again, I suspect this will impact your Income tax
- It expires in the money. This is where it gets complicated.
If a short put option expires in the money, shares are assigned to you at the strike price of the put.
For CGT purposes, do you record the shares you now own as having been bought at the strike price and record 100% of the premium received for selling the put as income?
Instead, do you record the shares as having been purchased at the actual price the share trades at on the day, the difference between the option strike price and actual share price as an income tax loss and the premium received as an income tax gain?
Let's take an example using fake numbers, let's say KO trades at $105 today and I sell a put option at a $100 strike with expiry on September 16th and receive a $1 premium. Come September 16th, KO closes at $95 and I'm forced to buy 100 shares at $100 each. In the options world, people talk of a cost basis of $99 (the $100 paid less the $1 received). The tax situation is likely a different story.
I'm not sure that the revenue would be satisfied with recording the shares purchased at $99 and ignoring the option.
So, did I pay $100 for the shares but buy KO at $95 for CGT purposes (the price it closed at on the purchase date) and have a $4 income tax loss (the difference between price paid and actual price, less the $1 received when selling the option). To me, this is the most sensible solution as I could force the $4 option loss by buying back the short option just before close at close to $5 and then buy the shares for $95, leaving me in the same position.
Or did I pay $100 for CGT purposes and have an income tax gain of $1 for the option sale? This would imply extra income tax on $5 now ($4 loss versus $1 gain) but reduced CGT in the future due to the $5 higher cost basis.
I suspect the first option is correct. If I couldn't get a definitive answer due to it being such a grey area, my back was against a wall and I was due to submit a return, above all else, I'd make sure to be consistent. However, professional advice is always the best route.
The above is all for a short put sale. Then you have to consider long puts, short calls and long calls.
Furthermore, many people, having been assigned a share, sell covered calls. Again, easy if they expire out of the money but what if they expire in the money and your shares are called away? Does it make a difference if it's the shortest month of the year and your shares are held for less than 30 days?