Cover Call option cost basis after impact from E*Trade causes review of each transaction

[kgalusha]

I downloaded the consolidated 1099 from E*Trade/Morgan Stanley today into my 2023 TurboTax Premier.  It asks me to review all my cover called to confirm the cost basis is zero as listed on the 1099-B hardcopy.  That is quite a bit of work.  Why am I asked to confirm the cost basis?   Isn't zero correct for a cover call?

Today was the first day the download from E*Trade was available.

[Spino]

TT is doing this as a form of error checking. One way to do it expeditiously is to wait until "final review" and then TT will pop up each error in sequence. But the answer is, yes, I think you will have to confirm each zero entry is indeed correct sometime before you can file the return.

[kgalusha]

I don't recall needing to confirm every covered call sale in previous years.  10s or 100s of trades.  Just noticed it is doing it for stock share sales as well, and import doesn't like the "&" in AT&T. Makes you change each entry after import.  Crazy extra work.

[Spino]

Yeah, software changes. Generally validation is considered good, but this might need some reconsideration. Of course, I always advise that people with 100s of transactions (especially complex ones) should probably NOT use the automatic import. Instead, in these situations I recommend summary entries supported by attaching the actual data from the brokerage.

This alternative is not immediately obvious in the interview. The actual number of people doing many complex transactions and self-filing using TT is probably a small percentage of filers, but it's also probably more common now than it has ever been in the past.

[kgalusha]

not a good software change and should be modified.  I may be the first the complain, but I'm sure many more will be negatively impacted/surprised.

These were all covered transactions and the unnecessary confirmation of cost basis seems random and a waste of time.

[am003e]

The covered call data entry experience is thoroughly broken and requires borderline dubious user workarounds which I will attempt to describe here.  I too have options trades with Morgan Stanley / E*Trade. The user flow here exhibits what must be a series of software bugs - and it's been there for at least two years.  (I had this same issue on my 2022 return and told my "reviewer" about it - but it's still not fixed.)   When I open each trade to review it, the automated data upload system has recorded cost basis and transaction amount, but not the type.  That means I must select "Option" for each one.   That's fine, but if I then select that the option "Expired" (which it did) the online UI eliminates my ability to log the proceeds.  Click "Expired" and watch box 1d "Proceeds" vanish from the UI!  My guess is that the person who designed the interface does not understand selling covered calls, only buying calls.  My workaround, which I believe "probably" leads to correct data, is to say the option was "Sold" (because it was, when I opened the contract initially) so I can include the proceeds.   But wait, there's more.  The online UI also asks how I "received" this investment and lets me select "I purchased it" or "I received it in a divorce settlement."  Of course, neither of these is accurate.  I selected "I purchased it" even though that's not happened - I opened a contract and received money for it.    But wait, there's more.  The "date sold or expired" and "date this investment was acquired" are flipped, thereby making them out of chronological order.   I forget whether un-flipping them throws an error or the opposite does.  TurboTax staff, if you're reading this please make these changes:

- Create a user flow where the user can indicate they sold a call (rather than bought one).

- Allow the user to say they "opened a contract" rather than "purchased" it.

- Allow the user to say it expired without TurboTax deleting data about the sale.

- Do not flip the dates of acquisition and disposal.  Do not throw an error when these dates are correct.

-  Do not throw a warning about cost basis for the covered call.

- Fix the message at the top of the page which states "Covered and reported mean the same thing." Investors selling covered calls (where "covered" means something else entirely) will be misled.  Add the this sentence "The term 'covered calls' refers to a type of  transaction you can enter in this interface." My guess is the PM responsible for this feature was also confused by this. 

[andrewpm2]

I can concur that this is completely messed up and confusing in TT. What's more is that TT doesn't seem to understand cash secure put sales either.  How do I properly enter the cost basis for a cash secured put option? Do I enter the total amount sey aside as collateral needed to secure the option?  Please help.

[am003e]

For anyone who has landed here, I'll update my original message above with some more tips:

- First, the UI is completely broken as I mentioned.  However, it is more broken for E*Trade than it is for Schwab.  I have accounts in which I traded options at each bank, and only E*Trade's imported data led to the disaster described above.

- The Schwab option trade data which did _not_ throw errors was auto-imported as sales of "stock (non-employee)."  Let me repeat that: the data was _incorrectly_ imported as stock, not as options.  But this incorrect import seemed to lead to _correct_ data entry in terms of gains and dates.  I did not have to go in and manually verify each one.  This also means that I might advise others to select "stock" rather than "options" when manually correcting your E*Trade options sales.  Similarly, if you want to keep using TurboTax, you should probably stop using E*Trade.  Unfortunately, I don't know which banks (other than Schwab) to recommend instead.

- Finally, on a lighter note, I started treating the manual updating of my 116 E*Trade transactions as a game.  Load transactions, scroll to 5 page selector button, select page number, scroll up to required review item, click into item, update dropdown sale type, update dropdown how obtained, update how disposed, update cost basis, confirm no special situations apply, confirm zero basis, hit Continue.  This process took me about 90 seconds per transaction at first, but then I got it down to 45 seconds each, then 30 seconds each.  So I wound up spending more than 58 minutes but less than 174 minutes on this one step.     If a product manager is reading this, I recommend adding this stat to your KPIs.

[am003e]

Andrew, I'll do my best here based on what I experienced selling covered calls:

- When entering transaction type, select "stock (non-employee)" or "options."

- When it asks you how you obtained the option, select "I purchased it" (even though this is not true).  For the purchase date, include the date it expired (if it expired) and the date you bought to close (if you bought to close).

- When it asks you how you disposed of the option, select "I sold it" (even if this is not true).  When it asks the sale date include the initial sale date (when you opened the contract).

- Note that the above dates will be out of chronological order.  This did not throw an error when I did it this way.

- When it asks for your cost basis, say "0."  I know, there is no cost basis for cash secured puts.  Say 0 anyway.  (However, if you bought it to close then put this value there instead. )   The UI will ask you to confirm that your basis is really zero.  Do so.

Please note: the above is all me guessing based on my experience with covered calls.  And what was successfully auto-imported from Schwab (which didn't have the same issue with covered calls as E*Trade; see my other recent post on this page).  Hope this helps.

[andrewpm2]

Thanks for the info.  This is what I eventually did as well.  I think the main culprit is because TT is taking the transaction data as a "stock" transaction and not an "options" transaction, which pretty much screws the whole thing up from the get go.  I also chose "sold" w "$0" cost basis and then confirmed twice.  Fortunately you can use the bulk feature to update these details for multiple transaction, but unfortunately, you have to confirm each individual transaction twice.  Depending on how many options you sell in a year, it could be a little or alot of tedious work.  Hope they fix this next year.  I primarily sell options so I had to fix 100+ transactions...

[kgalusha]

I also "zeroed" cost basis to get through the process.  My covered call and cash secured puts cost basis weren't zero , but I just took the hit.

[senate732]

I've had issues with having to validate which is tedious.  Is there a place you could link or look up to find more about the Summaries?  Also can TurboTax handle Summaries?

[senate732]

Thank you,

This is my exact issue and why I am searching now to find software that is capable of handling the basics of option trading. I am not creating some Iron Condor.  Mainly selling calls against my holdings or selling cash secured puts.  

[Mike9241]

 imported as stock, not as options. doesn't matter. what matters is that the sales price and cost basis are correct and that the sale date is before the purchase expiration date. 

note summary entries for a broker are inconsistent with importing from them. it's one or the other, but you can import for one broker and not for another

summary entires? yes, Turbotax can handle summary entries of which there are two types. those without adjustments such as wash sale. to get to this worksheet in the jump-to/search box type "capital" no quotes and then look for and open the form 1099-B wks. near the top of the worksheet you'll see "Form 8949 Reporting Exception Transactions". this is where summary transactions without adjustments are entered. For these there is no need to provide detail to the IRS

for other transactions with adjustments, they too can be entered as summary totals.

on the worksheet you should see a line "Use the Capital Asset Sales Worksheet to enter individual sales (a slight misrepresentation). click on quickzoom.

a new window will open up with a form. highlight it with your mouse and click finish

you can actually enter summary amounts with adjustments here.

check the box that says this summarizes multiple trades (generates a code M on form 8949 and form 8453)

the column disalllowed wash sale is a mystery to me because any entry generates an error. leave it blank.

in the adjustment amount column enter the amount (a wash sale is entered as a positive number) and a code W in the next box

if you look at the 8949 you see codes M and W (or some other code if the adjustment is not a wash sale)

what you must do for those transactions with adjustments that have been summarized is to send detail to the IRS using form 8453 which should be generated automatically from checking the multiple trade box

what do I do? enter summary totals which do not have to be separately reported to the iRS. for others which generally aren't more than 6 a year i enter one by one to avoid having to file the 8453/1099-B. if you go the 8453 route read the instructions because there is a time limit to file and it goes to a special address. This info will be in the Turbotax filing instructions