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Options by Michael C Thomsett

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Chapter 19 Taxes: The Wild Card of Options Trading

When there is an income tax, the just man will pay more and the unjust less on the same amount of income.

̶̶ Plato, The Republic, ca. 360 bc

Taxation of options profits and losses is one of the most complex and specialized areas of the U.S. federal income tax code. This chapter summarizes the major rules and exceptions that apply to options, but not to anything else. A handful of special rules affect profitability as well as timing. Ultimately, these rules could determine whether a strategy makes sense.

Tax Rules for Options

The tax rules for options are not as simple as those for most forms of investment. In the typical transaction of stock, for example, shares sold at a profit are taxed in ...

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