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Option Exercises and Stock Assignments

Since all option contracts give the buyer the right to buy or sell a given stock at a set price (the strike price), when an option is exercised someone exercised their rights and you may be forced to buy the stock (the stock is put to you) at the PUT option strike price, or you may be forced to sell the stock (the stock is called away from you) at the CALL option strike price.

There are special IRS rules for options that get exercised, whether you as the holder of the option (you bought the option) exercised your rights, or someone else as the holder of the option (you sold the option) exercised their rights.

IRS Publication 550 page 57 features a table of what happens when a PUT or CALL option is exercised. The table is summarized below:

When a Put: If you are the holder: If you are the writer:
Is exercised Reduce your amount realized from sale of the underlying stock by the cost of the put. Reduce your basis in the stock you buy by the amount you received for the put.

 

When a Call: If you are the holder: If you are the writer:
Is exercised Add the cost of the call to your basis in the stock purchased. Increase your amount realized on sale of the stock by the amount you received for the call.

Your option position therefore does NOT get reported on schedule d, but it's proceeds gets included in the stock position from the assignment.

When importing option exercise transactions from brokerages, there is no automated method to adjust the cost basis of the stock being assigned. Brokers do not provide enough detail to identify which stock transactions should be adjusted and which option transactions should be deleted.

TradeLog™ software includes an option Exercise/Assign function, allowing users to make adjustments for most exercise and assignments situations.  See our Users Guide for details.

Learn More... Broad Based Index Options

 

Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Armen Computing Ltd. makes no investment recommendations and does not provide financial, tax or legal advice. Please consult your tax advisor or accountant to discuss your specific situation. You are solely responsible for your investment and tax reporting decisions, and you should carefully evaluate all information delivered to you by Armen Computing Ltd. and TradeLog. Not all information may be appropriate for all investors.