AboutGlenn D Schnabel Expertise I can answer most federal individual income tax questions.
I can not provide legal advise.
Experience I have worked for a CPA firm for over 11 years.
I have worked in private as well as government
I have recently been running a tax preparation office, mainly focusing on
individual income taxes
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Education/Credentials I have my B.S.B.A in Business Administration . Concentration in Accounting
I have gone to yearly tax seminars and have tried to keep up with the
evolving tax changes
Awards and Honors Over my years I have received local awards for contributions to worthy
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Question I have sold puts on the following ETF's. UNG,FAS,URE ERX. They are listed by google as index ETF's. According to IRS publication 550 these are not equity options since they are not based on a narrow base of stocks and therefore should qualify as 1256 Contracts. If so the profits are only taxed at 40% short term and 60% long term capital gains. Am I right? Do these qualify, in your mind, as 1256 contracts?
Answer Edwin,
According to the IRS:
Holders of puts and calls. If you buy a put or a call, you may not deduct its cost. It is a capital expenditure.
If you sell the put or the call before you exercise it, the difference between its cost and the amount you receive for it is either a long-term or short-term capital gain or loss, depending on how long you held it.
If the option expires, its cost is either a long-term or short-term capital loss, depending on your holding period, which ends on the expiration date.
If you exercise a call, add its cost to the basis of the stock you bought. If you exercise a put, reduce your amount realized on the sale of the underlying stock by the cost of the put when figuring your gain or loss. Any gain or loss on the sale of the underlying stock is long term or short term depending on your holding period for the underlying stock.
Put option as short sale. Buying a put option is generally treated as a short sale, and the exercise, sale, or expiration of the put is a closing of the short sale. See Short Sales , earlier. If you have held the underlying stock for 1 year or less at the time you buy the put, any gain on the exercise, sale, or expiration of the put is a short-term capital gain. The same is true if you buy the underlying stock after you buy the put but before its exercise, sale, or expiration. Your holding period for the underlying stock begins on the earliest of:
*
The date you dispose of the stock,
*
The date you exercise the put,
*
The date you sell the put, or
*
The date the put expires.
Also:
b) Section 1256 contract defined
For purposes of this section, the term “section 1256 contract” means—
(1) any regulated futures contract,
(2) any foreign currency contract,
(3) any nonequity option,
(4) any dealer equity option, and
(5) any dealer securities futures contract.
The term “section 1256 contract” shall not include any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract.
This is not my area of expertise. Please review the articles that I listed and make your own decision. Since you list the instruments as puts ,then I feel theyshould be treated as puts. There seems to be some murkiness on this topic.
If I come across any other information, I will be in touch.
