"Again, look at Pub 550. There's a whole section on calculating gain or loss."
If the MLP option is classified as an Equity Option, I agree, and there is no issue.
Because the MLP option is classified as a Section 1256 contract, Mark to Market tax accounting is being applied to the Section 1256 gain/loss on the 1099. Section 1256 contract Mark to Market tax accounting is different from regular Option accounting (I think). I think you are using the tax code's discussion of option tax accounting to discuss what is (in TD's opinion and on my 1099) Section 1256 contract accounting.
TD wants the Section 1256 contract tax accounting to have nothing to do with the purchase of the underlying asset. As a result, I think I have to account for the "loss of the option" upon exercise to have it make any sense.
Section 1256 tax code does say that execution of the Section 1256 contract for delivery of the underlying requires Mark to Market accounting. MOST section 1256 contracts settle for cash rather than the underlying, and in that case the Mark to Market account is easy - cash received minus call premium paid = 1256 gain or loss.
There's nothing in the Section 1256 contract tax code that says anything about putting premium paid to buy a section 1256 Contract into the cost basis of the underlying received. It just says upon exercise of a section 1256 contract "the previously discussed" mark to market rules apply.
I agree if these 1256 contracts were taxed like options it would make sense to pay the gain on exercise, and also have an equivalent higher cost basis. But the cost basis of the MLP is not being increased as a result of buying the contract - TD says the contract and the MLP purchase are separately taxed items.
So....the only way for it to make sense is for the loss of the contract to offset equally the gain of the mark to market. Otherwise, I'm taxed twice.
Anyways, I understand what you're saying, my issue is with TD reporting of the call exercise.
