Tax Implications: Any buying or selling of stocks, options, bonds, etc., generally has tax implications.
Holding Periods
Capital Asset: Stocks are considered capital assets.
Short-term: Held for 1 year or less.
Taxed at ordinary income tax rates.
Long-term: Held for more than 1 year.
Taxed at 0%, 15%, or 20% depending on income bracket.
Taxation Details
Ordinary Tax Bracket: Tax rate depends on your income bracket (e.g., 37%).
Futures Contracts: Different taxation—40% short-term, 60% long-term regardless of holding period.
Example Situations
Short-Term Capital Gains: If you buy a stock on December 31 and sell it on December 31 the following year, it's short-term.
Long-Term Capital Gains: If you sell the stock after holding it for more than a year (e.g., buy on December 31 and sell in January 1 of the third year), it's long-term.
Tax Rates: Example, taxable income such as $50,000/year can affect whether gains are taxed at 0%.
Additional Taxes: High income earners may face extra taxes like Net Investment Income Tax (3.8%) and state taxes.
Options Trading
Non-taxable Events: Purchasing options is not taxable until either sold, expired, or assigned.
Holding Period:
Selling covered calls do not affect holding period of the underlying stock.
Gains are taxable based on the underlying stock's holding period.
Taxable Events: Selling options, expiration, or assignment make gains taxable.
Special Cases
Dividends:
Qualified dividends are treated as long-term capital gains.
Receiving dividends from American companies has favorable tax treatment.
Offset and Carryforward Rules
Capital Losses: Offset capital gains first, then other income up to $3,000/year.
Excess losses are carried forward to future years.
Practical Tips
Recording Basis: Buying options or calls adjusts your basis in the stock.
Example: Buying stock for $10, selling a call for $11, total basis becomes $12.
Brokerage Tracking: Most brokerage houses track your basis and gain/loss information.
Summary
Capital Gains Rules: Know the difference between short-term and long-term capital gains.
Options Impact: Understand the taxable events caused by selling, expiring, or assigning options.
Professional Advice: Consult tax professionals for complicated situations.