Long term versus short term gains and losses


S

Steve Dell

I trade covered call options, among other strategies. In doing so, I enter
the initiation of the trade as a "short sale" and the closing of the
transaction as "covering the short sale." That part, while not elegant, work
reasonably well.

However, when I do a summary of schedule D gains and losses, some of these
transactions are showing up as "long term" even though I might have held
them two to ten months, not years. It doesn't seem to matter if the short
sale was done in 2003 or 2004.

The following is an example of one of them:

Security: Call Allied Capital Nov 25
Shares: 800 (which is the equivalent of 8 options)
Bought: 11/17/2004 (the date that I covered the short position)
Sold: 10/26/2004 (the date I wrote the covered call)
Gross Proceeds: $ 700.00
Cost Basis: $2100.00
Gain/Loss $1400.00

I held the position for 21 days. However, Quicken 2004 wants to categorize
this loss as long term.

To make this more difficult to understand, some of the call option positions
that I've held for similar lengths are properly categorized as short term.

Any ideas why or suggestions?

TIA

Steve Dell
 
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J

John Pollard

Steve said:
I trade covered call options, among other strategies. In doing
so, I enter the initiation of the trade as a "short sale" and
the closing of the transaction as "covering the short sale."
That part, while not elegant, work reasonably well.

However, when I do a summary of schedule D gains and losses,
some of these transactions are showing up as "long term" even
though I might have held them two to ten months, not years. It
doesn't seem to matter if the short sale was done in 2003 or
2004.
The following is an example of one of them:

Security: Call Allied Capital Nov 25
Shares: 800 (which is the equivalent of 8 options)
Bought: 11/17/2004 (the date that I covered the short
position) Sold: 10/26/2004 (the date I wrote the
covered call) Gross Proceeds: $ 700.00
Cost Basis: $2100.00
Gain/Loss $1400.00

I held the position for 21 days. However, Quicken 2004 wants
to
categorize this loss as long term.

To make this more difficult to understand, some of the call
option positions that I've held for similar lengths are
properly categorized as short term.
Any ideas why or suggestions?

See kb article 7099. Watch the wrap.

http://search.intuit.com/KCS/viewdocument.do?searchMode=GuidedSearch&docID=KC.quicken-2004-win-7099html&dialogID=11640529&iterationID=1&url=http://www.intuit.com/support/quicken/2004/win/7099.html?source=1&docName=Short+++++sale+appears+under+Long+or+Short+Term+in+the+Capital+Gains+report&sourceKmap=&viewFrom=Main&docDate=<DocDate><Y>2002%20%20</Y><M>08</M><D>20</D></DocDate>&locale=
 
S

Steve Dell

In reading the posting, Quicken makes reference to "complex laws concerning
short sales." I must be brain-dead. if the so called "holding period,"
either short sale or conventional long sale, is less than 12 months, what
difference does it make?

Steve
 
C

Charlie48K

Steve Dell said:
In reading the posting, Quicken makes reference to "complex laws concerning
short sales." I must be brain-dead. if the so called "holding period,"
either short sale or conventional long sale, is less than 12 months, what
difference does it make?
Short sales are long term or short term depending on the holding
period of the stock used to settle the claim. If you held shares when
you made a short sale and later used them to satify the short sale,
their holding period determines the class of the short sale, not the
length the short sale was open. Other items such as option can also
effect the period.
 
T

Tom Healy

<< Short sales are long term or short term depending on the holding
period of the stock used to settle the claim. If you held shares when
you made a short sale and later used them to satify the short sale,
their holding period determines the class of the short sale, not the
length the short sale was open. Other items such as option can also
effect the period. >><BR><BR>

Short sales always result in short-term gains or losses. Short sales "against
the box" puyt the holding period of the underlying stock in abeyance until the
short is covered (i.e., you can't convert a short-term holding period to
long-term by doing a short sale against the box).


--
Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: (e-mail address removed), since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772
 
J

John Pollard

Tom said:
<< Short sales are long term or short term depending on the
holding
period of the stock used to settle the claim. If you held
shares when
you made a short sale and later used them to satify the short
sale,
their holding period determines the class of the short sale,
not the
length the short sale was open. Other items such as option can
also effect the period. >><BR><BR>

Short sales always result in short-term gains or losses.
I must be misunderstanding something here. According to the
IRS,

"Normally, the short sale of a capital asset is considered to
result in short-term gain or loss since the stocks (or other
assets) that are delivered to "cover" the short sale are
purchased the same time as the delivery. However, if stock held
by the taxpayer for greater than one year is used cover the
short sale, then the gain or loss is long-term."

See: http://www.irs.gov/faqs/faq-kw203.html
Short
sales "against the box" puyt the holding period of the
underlying stock in abeyance until the short is covered (i.e.,
you can't convert a short-term holding period to long-term by
doing a short sale against the box).
My *extremely* limited knowledge of this "against the box"
business suggests it does not relate to the issue of whether the
sale results in short or long term gains; just when you owe the
taxes on the sale. I do not see where the original question of
this thread had to do with converting a short position to a long
one.

[Intuit and several other web sites also seem to agree that
there still is a (complicated) way, entailing risk, to postpone
the due date of taxes on short sales. Again, though, this
appears to include the possibility of ultimate long term gains
on the short sale].


It appears that both Intuit and the IRS believe that a short
sale can result in a long term gain/loss; can you explain why
you believe that: "Short sales always result in short-term gains
or losses"?
 
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S

Steve Dell

Boy, I'm confused, but it doesn't take very much to confuse me.

Let me give an example and see if we can figure out why things are either
long or short.

Let's say that I own 1500 shares of XOM that I've owned since 1998. On
October 1, 2004, I write 15 "covered calls" XOM DEC 50's. (Symbol would be
XOMLJ.) I get $2.00 a share or $3000.00. The way that Quicken handles
covered calls, I have initiated a "short sale."

On November 15, I buy back my covered calls, which in essence is covering
the short. Let's further say that I bought each one back for $1.00 a share.
I did nothing with the underlying stock.

In my example, wouldn't I have a $1500 short term gain? I had the short
position for roughly 45 days. I sold it for $3000 and bought it for $1500.
All I did with the XOM stock was receive a dividend during those 6 weeks.

Why is this considered long term and not a short term gain?

Thanks again for your patience in trying to explain something that should be
pretty easy.

Steve

John Pollard said:
Tom said:
<< Short sales are long term or short term depending on the
holding
period of the stock used to settle the claim. If you held
shares when
you made a short sale and later used them to satify the short
sale,
their holding period determines the class of the short sale,
not the
length the short sale was open. Other items such as option can
also effect the period. >><BR><BR>

Short sales always result in short-term gains or losses.
I must be misunderstanding something here. According to the IRS,

"Normally, the short sale of a capital asset is considered to result in
short-term gain or loss since the stocks (or other assets) that are
delivered to "cover" the short sale are purchased the same time as the
delivery. However, if stock held by the taxpayer for greater than one year
is used cover the short sale, then the gain or loss is long-term."

See: http://www.irs.gov/faqs/faq-kw203.html
Short
sales "against the box" puyt the holding period of the
underlying stock in abeyance until the short is covered (i.e.,
you can't convert a short-term holding period to long-term by
doing a short sale against the box).
My *extremely* limited knowledge of this "against the box" business
suggests it does not relate to the issue of whether the sale results in
short or long term gains; just when you owe the taxes on the sale. I do
not see where the original question of this thread had to do with
converting a short position to a long one.

[Intuit and several other web sites also seem to agree that there still is
a (complicated) way, entailing risk, to postpone the due date of taxes on
short sales. Again, though, this appears to include the possibility of
ultimate long term gains on the short sale].


It appears that both Intuit and the IRS believe that a short sale can
result in a long term gain/loss; can you explain why you believe that:
"Short sales always result in short-term gains or losses"?
 

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