I live in Ireland. I have recently started trading derivatives using a broker based in the US. More specifically I am trading options on US stocks and ETF's. For the record have not yet made any profit doing this but if I did I am just wondering how I would calculate any tax due or what do I need to declare to the Irish Revenue for this type of trading?
Tax on Trading Derivatives
- Thread starter JJWilde
- Start date
If you're trading on a regular basis then it may be income tax etc that you need to be concerned about and not CGT!
This is not an authoritative guide but maybe some food for thought. You may need to get professional tax advice.
liamburnsandco.ie
This is not an authoritative guide but maybe some food for thought. You may need to get professional tax advice.
Irish Tax Guide to Cryptocurrency Trading & Investing - Liam Burns and Co
With the surge in the amount of people now dabbling in the cryptocurrency* market, herewith a guide to the Irish tax implications. These relate to gains and profits on trading and/or investing in the currency type. *Some of the cryptocurrencies, […]
liamburnsandco.ie
I suppose the question is are derivatives of assets treated the same as the assets themselves for taxation. I understand if I buy and sell a share in XYZ, any profit on that trade is liable for CGT. So, if I bought and sold an option contract on XYZ, is the difference treated the same?
I dont think its income, in the sense that its not like a dividend.
The only thing I know for sure is that tax is always owed somewhere
I dont think its income, in the sense that its not like a dividend.
The only thing I know for sure is that tax is always owed somewhere
Lord Rossmore
Registered User
- Messages
- 20
Seems like a bit of a grey area with regards to tax. I can see how this activity could be seen as either liable for CGT or Income Tax. You could say, well, I am buying an option and selling it again just like a share for a profit, so the difference is subject to CGT. But if you are doing this on an active basis and you described the activity as "trading derivatives", then I can see why it could be seen as trading income... best to seek professional advice
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:
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?
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.
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?
Last edited:
For what it's worth, my strategy started this year and is to sell naked puts on dividend producing shares I want to own anyway. If the shares drop below the strike and I'm assigned, I'll be getting them at a discount to today's price. If they don't drop to that level, I keep the option premium but don't participate in any huge rallies in share price that may happen.
If I'm assigned, my goal will be to sell a covered call with an expiry three months out at whatever strike gives me about a 0.75-1% premium. That'll mean holding shares assigned for a minimum of 3 months at all times. The 3 month minimum holding period, for most shares, will include collection of at least one quarterly dividend.
Take KO (Coca Cola) for example again - trading today at $61.15 with a 2.84% yield. If I had those shares today, I could sell a covered call with a December 16th expiry and $67.50 strike for $0.52. It goes ex dividend on Sep 15th so I'd collect a $0.44 dividend regardless of what happens.
Basically, I'm not trying risky option strategies but am hoping to more than double my dividend yield on stable, long-term, holds.
Will Coca Cola have rallied beyond its all time high on December 16th - it's possible but probably more likely it'll be below the $67.50 strike.
If it stays below $67.50, I keep my shares, collect my $0.44 dividend and add the $0.52 option premium to my returns - and repeat the process for March expiry.
If it rallies above $67.50, I'd be forced to sell the shares at $67.50, over 10% above today's price, and keep the $0.52 option premium (and $0.44 dividend). I'd then sell naked puts every month again for a future expiry, collect more premium each month and, eventually, be assigned the shares again.
Here's a link to a book on this strategy: https://www.amazon.co.uk/Options-Wheel-Strategy-Complete-Portfolio-ebook/dp/B095J536ZR?ref_=d6k_applink_bb_dls&dplnkId=d7d90cd1-831b-47ee-8045-a487b69ad596 (The Options Wheel Strategy: The Complete Guide To Boost Your Portfolio An Extra 15-20% With Cash Secured Puts And Covered Calls)
I haven't read the book yet but given its reference to 15-20% returns versus my aim for 0.75%-1% per quarter, they will be choosing options closer to the money with more chance of getting assigned. Though following the same principles, I'd consider them trying to make high returns using options versus me trying to supplement my dividends with option income by choosing options that are much more likely to expire out of the money.
If I'm assigned, my goal will be to sell a covered call with an expiry three months out at whatever strike gives me about a 0.75-1% premium. That'll mean holding shares assigned for a minimum of 3 months at all times. The 3 month minimum holding period, for most shares, will include collection of at least one quarterly dividend.
Take KO (Coca Cola) for example again - trading today at $61.15 with a 2.84% yield. If I had those shares today, I could sell a covered call with a December 16th expiry and $67.50 strike for $0.52. It goes ex dividend on Sep 15th so I'd collect a $0.44 dividend regardless of what happens.
Basically, I'm not trying risky option strategies but am hoping to more than double my dividend yield on stable, long-term, holds.
Will Coca Cola have rallied beyond its all time high on December 16th - it's possible but probably more likely it'll be below the $67.50 strike.
If it stays below $67.50, I keep my shares, collect my $0.44 dividend and add the $0.52 option premium to my returns - and repeat the process for March expiry.
If it rallies above $67.50, I'd be forced to sell the shares at $67.50, over 10% above today's price, and keep the $0.52 option premium (and $0.44 dividend). I'd then sell naked puts every month again for a future expiry, collect more premium each month and, eventually, be assigned the shares again.
Here's a link to a book on this strategy: https://www.amazon.co.uk/Options-Wheel-Strategy-Complete-Portfolio-ebook/dp/B095J536ZR?ref_=d6k_applink_bb_dls&dplnkId=d7d90cd1-831b-47ee-8045-a487b69ad596 (The Options Wheel Strategy: The Complete Guide To Boost Your Portfolio An Extra 15-20% With Cash Secured Puts And Covered Calls)
I haven't read the book yet but given its reference to 15-20% returns versus my aim for 0.75%-1% per quarter, they will be choosing options closer to the money with more chance of getting assigned. Though following the same principles, I'd consider them trying to make high returns using options versus me trying to supplement my dividends with option income by choosing options that are much more likely to expire out of the money.
Last edited:
BigPineapple
Registered User
- Messages
- 86