M2M Treatment of Assigned Put

[Chester205]

Hi, I have made the Section 475 trader election and mark all open positions to market at year end as if they were sold.  I have a question about the treatment of premium income received from an assigned put on shares not sold in the calendar year.

If I write a put, get assigned, then I lower the cost basis of the underlying stock by the amount of the put premium when those shares are sold.  

However, if the assigned shares are not sold during the calendar year, I will still make a M2M adjustment at year end based on the market price on 12/31, but do I decrease my cost basis by the put premium received?

The 1099-B doesn't even show the put option transaction as occurring, so I wonder how the IRS will ever reconcile these trades.  

Thank you!

[DaveF1006 · Accepted solution]

It depends. Under the Section 475 mark-to-market (M2M) election, all open positions are treated as if they were sold at fair market value on the last day of the tax year. However, the treatment of the put premium in your scenario depends on the timing and nature of the transactions.

If you write a put and get assigned, the premium received is typically used to reduce the cost basis of the underlying stock. This adjustment to the cost basis is deferred until the shares are sold. However, under the M2M election, the unrealized gain or loss on the assigned shares is recognized at year-end based on their fair market value as of December 31. The put premium does not directly affect the M2M adjustment because it has already been accounted for when determining the cost basis of the shares.

In summary:

• The put premium reduces the cost basis of the assigned shares.
• The M2M adjustment at year-end is based on the fair market value of the shares as of December 31, without further adjustment for the put premium.