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Issues with Calls

Bruce Buckley
Bruce Buckley Member ✭✭
edited August 2018 in Investing (Windows)
I also have this problem.  I occasionally hold a call option until expiration then exercise it for the underlying security.  So the option transaction may occur in one year but the sale of the underlying security may not happen until a following year.

I have been recording the exercised call as a zero dollar sale and the purchase of the underlying security as a buy at the strike price.  But if the sale occurs in a following year, Quicken capital gains for the years are off since the "loss" associated with the premium of the exercised call is in one year and the gain or loss for the security is in the following year.  Of course the brokerage reports it correctly as all associated with the security but it renders the capital gains reports in quicken useless.

Should I record the exercised call as a sale at the purchase price to generate a zero gain transaction then record the purchase of the underlying transaction as a purchase at the strike price PLUS premium per share to generate the higher cost basis?  How will that impact the reports on portfolio returns?


Note: This conversation was created from a reply on: Exchange-Traded Call Option Planning To Exercise.

Comments

  • Tom Young
    Tom Young SuperUser ✭✭✭✭✭
    edited March 2018
    "Should I record the exercised call as a sale at the purchase price to
    generate a zero gain transaction then record the purchase of the
    underlying transaction as a purchase at the strike price PLUS premium
    per share to generate the higher cost basis? "

    That strikes me as the right way of doing this.  The call transaction - buy a call, exercise the call - isn't an income/loss event and your accounting would reflect that and transfer the call's cost to the strike price purchase, correctly.
  • Unknown
    Unknown Member
    edited August 2018
    Similar situation. Sure wish Quicken would fix their options handling...

    What if the exercised call is closed (cover short) at zero value, and the original premium proceeds amount applied to the stock as Return of Capital?  That updates the stock's cost basis alright - is anything else messed up? 

    It is just mentally easier for me to follow what is happening that way.


  • Tom Young
    Tom Young SuperUser ✭✭✭✭✭
    edited August 2018

    Similar situation. Sure wish Quicken would fix their options handling...

    What if the exercised call is closed (cover short) at zero value, and the original premium proceeds amount applied to the stock as Return of Capital?  That updates the stock's cost basis alright - is anything else messed up? 

    It is just mentally easier for me to follow what is happening that way.


    If I'm following what you're saying here - and I may not be - that doesn't seem correct.  If you sell a call and it expires worthless then you have a reportable gain on that transaction and the IRS is going to expect to see it on your income tax return.

    The proceeds from your original sale certainly are not a return of capital.  Returns of capital come from the company that issued the stock, not the gambler that bought the call and lost.
  • Unknown
    Unknown Member
    edited August 2018

    Similar situation. Sure wish Quicken would fix their options handling...

    What if the exercised call is closed (cover short) at zero value, and the original premium proceeds amount applied to the stock as Return of Capital?  That updates the stock's cost basis alright - is anything else messed up? 

    It is just mentally easier for me to follow what is happening that way.


    If it expired worthless, then it was not exercised...    :-)
  • Unknown
    Unknown Member
    edited August 2018
    But it is beginning to feel wrong anyway... RtC will change cash balance which the closed option position did already.   I do not see another way to adjust cost basis cleanly in Quicken.
  • Tom Young
    Tom Young SuperUser ✭✭✭✭✭
    edited August 2018

    But it is beginning to feel wrong anyway... RtC will change cash balance which the closed option position did already.   I do not see another way to adjust cost basis cleanly in Quicken.

    It's not a return of capital in a legal sense.  If you want to think about it as a "reduction of my investment in Company X" that's fine, you're free to do so.  But for tax purposes you report your gain.
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