Tax treatment of written options spanning end of year

If this has been dealt with before please feel free to point me there...

So i am doing my 2010 tax return. let us assume that I am classified as a trader for the purpose of options assessment, and we are dealing with written options that are open at 30 june 2010.

From a report by Deloitte entitled 'tax treatment of ETOs' it states that traders and speculators should be assessed on premium of options written when recieved /recievable (as income). The report also moots an alternative that the speculator should be assessed on net profits or losses when the position is closed out, but says this is "not the preferred argument"

If using the first method ie declaring all the premium as income in the year the option is written, the report goes on to completely fail to mention what would then happen if you closed out the position (resulting in either a loss or a net profit less than the premium originally recd) before expiry in the following tax year. If you had declared the premium as income presumably you would then claim the cost to buy it back as an 'expense' in the following year? Even though the net result may be correct in a lot of cases the effect is to pay tax in advance on profits that dont really exist at that point

I much prefer the second method, which makes more sense, which would mean that any short option positions open on 30 june 2010 , would be not reported on at all in the 2010 tax year but would be reported in the 2011 year once a 'result' had been obtained.

anyone have this same problem and how do you treat it?


thanks
village

VI,

Check out the link below from the thread that is active at the moment. It should clarify your query.

https://www.aussiestockforums.com/forums/showthread.php?t=15065

thanks for the reply grinder.

i have read that thread and still dont think anyone seems to have a definitive answer to the matter. fwiw i have assessed myself on the second method ie only accounting for closed out/expired/assigned positions and given the net figure to my accountant. all positions which were open at 30 june will be on next years calcs.

if this ever gets queried i will deal with it then, but if i need to defend it it at least has the virtue of being the fairest method, certainly far fairer than paying tax on as yet non existent profits.

village

village idiot said:

thanks for the reply grinder.

i have read that thread and still dont think anyone seems to have a definitive answer to the matter. fwiw i have assessed myself on the second method ie only accounting for closed out/expired/assigned positions and given the net figure to my accountant. all positions which were open at 30 june will be on next years calcs.

if this ever gets queried i will deal with it then, but if i need to defend it it at least has the virtue of being the fairest method, certainly far fairer than paying tax on as yet non existent profits.

village

Click to expand...

Tax will only be calculated on realized gains/losses

If you are classified as a trader, you put your premium as income. On 30 Jun, you use the market price of the option on that day as the cost price you need to pay to buy back the option (just to simulate mark to mark to establish your profit or loss on the position for the year?). When you finally close out the position, your PL for the year will be the price that you actually paid and the price on 30 Jun.

THIS IS JUST AN OPINION. Check with your accountant.