In 2020, I traded either call/put credit spreads on Robinhood. Upon 1099 import, for every "needs review" on option sell part, should I just put 0 cost basis?

[hjun-hur]

As mentioned in the title, I traded either call credit spreads and put credit spreads to earn premiums on Robinhood. Now, every credit spread includes option buy and option sell part, on the same expiration date, but different strike prices.

Upon 1099 import, all the option buy and sell parts of the credit spreads are recorded separately, and all option sell parts triggered "Needs Review" and repeatedly ask whether cost basis of 0 needs to be adjusted.  

Should I select "I know my cost basis and need to make an adjustment", and still put 0 for "Actual cost basis"?

My worry is that I am unsure exactly what it means when option buy and sell part out of single credit spread trade is recorded separately. If I am correct, most taxpayers can claim up to $3000 loss on stock/investment trading which I have always assumed comes from the end of year net gain/ loss. But such loss cannot be counted if it is considered wash sales (same stock buy and sell within 30 days)

Hypothetical Example:

Sell put option and receive credit of $10,000.

Simultaneously buy put option for $9,500 to create a max loss on the trade.

If the option expires OTM, then I receive a net credit and thus profit on the trade of $500.

My concern is now for this example, what exactly am I taxed on?

Is it, A. I get taxed on the $10,000, but then am able to claim up to $3,000 loss(Out of $9500 loss) so ultimately I am taxed on $7,000. (This is part I am worried the most since it will incorrectly incur huge tax burdens on me, even though I only earned $500, not $7,000 nor $10,000)

Or is it B. I get taxed on the net credit/profit of $500 regardless of the equity used for each leg of the options spread?

In addition, for example if I made a loss on this trade of $1,000( random number), would that loss count against the $3,000 we can claim for losses?

Thanks if you are reading this, I appreciate you taking your time to look through it and hopefully respond!

[Mike9241 · Accepted solution]

in your example, with the options expiring OTM you have a $10,000 profit on the short side and a $9.500 loss on the long side. you net $500 and that's what your get taxed on.  but these are two separate reportable trades. the expiration of the short side sales price $10,000 cost $0 profit $10K  and the expiration of the long side sales price $0 cost $9,500 loss $9.5K

proceeds/costs of options are not reportable until they expire unexercised. however, if an option is exercised there is no reportable gain or loss until the stock is sold

if the short side is exercised your tax basis would be the total purchase price of the stock less the net credit you received on the short option sale. thus no gain or loss until you dispose of the stock. 

if you exercise the long side (assuming you don't already own the stock) your tax basis is the total cost of the stock you purchase plus the total cost of the option you purchased and the net proceeds received is your sales price.

in a tax year short -term trades are netted producing either a net S-T gain or loss

similarly with long-term trades. 

if both net long-term and short-term are gains you get taxed on the total.

if either type is a loss they are netted. if the result is a net loss up to $3,000 is deductible the remainder carries over to the next year. if the result is a net gain, the entire net gain gets taxed. 

if both types are losses  the same $3,000 limit and carryover applies with short-term used first

[hjun-hur]

Thank you so much for detailed explanation!

[merlinj]

Thank you Champ @Mike9241 !! Is there any IRS link that deals with this situation? I went into panic mode with the exact same worry as described by the original questioner here.

I sold a put credit spread (Sell 12.5/Buy 10). On expiration date the underlying was trading at $10.1, so I got assigned on the $12.5 leg and the $10 leg got exercised. I had sold the spread 3 months ago for 1.41. Want to be sure that the $12.5 "income" is not what I am taxed against because in reality I have lost 2.5 - 1.41 = $ 1.09 per contract.

[fanfare]

@merlinj 

Refer to IRS Pub 550 which describes this situation and any other that you can think of.

NOTE:

Some brokers will supply you a 1099-B that conforms to IRS instructions found there, 

and some will not.

You are responsible for reporting correctly. 
OR

just submit the 1099-B the broker gave you, since your transactions are all covered transactions.

[JimB6]

I have a similar situation, however, I have a few hundred Credit/Debit Spreads over the course of the year.  Since the Profit/Loss will already be reported, I don't see the value in needing to enter erroneous data to respond to all of the "needs review" labels.  I say erroneous since TurboTax doesn't appear to understand the Short Leg of the spread.  That option is sold first, and then bought back later.  Last year, it did not understand, and would not let me enter the short position as the opening position.

And, the number of trades I have becomes onerous to enter detail on each and every one.

Recommendations?

Thank you

[JimB6]

Intuit never responded to my question.

Is there an answer?

[RobertB4444]

@JimB6  The accepted solution for this for stock trades has been the same in TurboTax for years - enter summary totals in the summary section of the 1099B and then attach a copy of the 1099B to the return so that the IRS can view the original transactions.  There is no reason that this can't work for cryptocurrency transactions as well.  The IRS has decided to treat them the same for tax purposes.