An investor goes long 1 XYZ Dec 35 put at $5 when XYZ’s market price is $36. XYZ’s market price falls to $32, and the investor closes the contract at intrinsic value. What is the tax consequence? $200 capital loss
I’m just confused. isn’t the same as exercising. for exercising it would be right to sell at 35. the market price is 32. if you exercise. that gives you 35-32. It looks the same as exercising.
Hi @Cecil_O_Hara,
It’s a common point of confusion because exercising a put and selling it at intrinsic value can produce the same dollar outcome at expiration, but they are treated differently for tax purposes. When you exercise a put, you sell the stock at the strike price, and any gain or loss is reflected in the stock’s cost basis. Taxes are then calculated when you sell the stock itself.
When you close a put at intrinsic value, you’re selling the option contract rather than transacting in the stock. In that case, your gain or loss is simply the sale price of the option minus what you originally paid for it. In your example, buying the put for $5 and selling it for $3 results in a $2 loss per share, or a $200 capital loss for the contract.
So while the payoff might look the same in cash terms, the IRS sees these as two separate types of transactions. Exercising affects your stock position and its basis, while closing the option creates a realized gain or loss on the option itself.
Hope this helps!
Best,
Mataia
