How to calculate imputed interest on options trades?
How to calculate imputed interest on options trades?
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personal_cloud · External communityPost link
External question — Personal Finance Stack Exchange
Author: personal_cloud
Original post: https://money.stackexchange.com/questions/156169
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All interest income (including imputed interest)
must go on 1040 line 2 taxable interest
. For example, if the interest rate is 5%, then I can buy 100 T-Bills for $95 each. After 1 year I get $100 per T-bill, so there is $5 imputed interest for each T-bill.
Similarly, I can buy 100 shares of AMZN, sell one $100 call contract expiring 1 year from now, and buy one $100 put contract expiring on the same date. (In other words, I get 100 shares, and the right plus obligation to exchange each one for $100 one year from now). If the risk-free interest rate is 5%, then I pay net $95 per share because I am paying now for a guaranteed $100 per share in one year. (Note: this is a simple example because AMZN does not pay dividends or HTB interest).
From an investment standpoint, both investments function similarly. In both cases the imputed interest is 5% and therefore putting $10K in either investment results in $500 on 1040 line 2. However I could not find specific literature on how the IRS calculates taxable interest on options trades. Does the broker automatically generate a 1099-INT? Does their calculation work one leg at a time, or is it only done for pure-interest strategies?
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D Stanley · External communityPost link
External answer — Personal Finance Stack Exchange
Author: D Stanley
Original post: https://money.stackexchange.com/a/156170
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Just because the net P/L of the trade basket is effectively capital gains at the risk-free interest rate does not make it "interest". T-bill gains are traded as interest because they trade at a discount
in lieu
of paying interest (which would be the "normal" source of income from a debt instrument). Options do not pay interest, but are priced at a discount purely because of TVM and arbitrage pricing theory, so there is no concept of "netting out" the gains of this basket and treating is as "interest".
In short, the P/L of each trade would be computed individually, classified as capital gains/losses, and then netted out in a 1099-DIV.
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Quoted from Forex.com.bd-Editorial External question — Personal Finance Stack Exchange Author: personal_cloud Source score (net votes, not local likes): 0 Original post: https://money.stackexchange.com/questions/156169 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. All interest income (including imputed interest) must go on 1040 line 2 taxable interest . For example, if the interest rate is 5%, then I can buy 100 T-Bills for $95 each. After 1 year I get $100 per T-bill, so there is $5 imputed interest for each T-bill. Similarly, I can buy 100 shares of AMZN, sell one $100 call contract expiring 1 year from now, and buy one $100 put contract expiring on the same date. (In other words, I get 100 shares, and the right plus obligation to exchange each one for $100 one year from now). If the risk-free interest rate is 5%, then I pay net $95 per share because I am paying now for a guaranteed $100 per share in one year. (Note: this is a simple example because AMZN does not pay dividends or HTB interest). From an investment standpoint, both investments function similarly. In both cases the imputed interest is 5% and therefore putting $10K in either investment results in $500 on 1040 line 2. However I could not find specific literature on how the IRS calculates taxable interest on options trades. Does the broker automatically generate a 1099-INT? Does their calculation work one leg at a time, or is it only done for pure-interest strategies?
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