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MTM and Short Puts

Short Put Assignment under MTM Election

So you have made the MTM Election and are now either calculating the IRC Sec 481(a) adjustment or the year-end MTM adjustment and two situations exist:

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  1. You hold short puts that were sold at a price that is significantly different at the adjustment date than when you originally sold them, and

  2. The short puts were assigned stock because they were in-the-money at expiration.

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What is the new basis of the stock?

Example

Let’s say you sold an AAPL Jan 15 2026 205 put on 12/11/2025 for $2.32 when AAPL was at $213.23.


On 12/31/2025 AAPL closes at $205.36 and the short put is valued at $2.95 meaning that to close that position you would sustain a $0.63 loss (originally STO for $2.32 followed by BTC of $2.95 on 12/31/2025)


With the MTM election in place, there is a deemed “close” of the position at $2.95 and the loss is recognized on your tax return as a taxable transaction.


Now, your new “basis” in the short put is $2.95.
 

At option expiration AAPL closes at $197.13 meaning that your 205 put is in-the-money and you are assigned 100 shares of AAPL at $205.00.


Is your tax basis $203.68 (the 205 strike/assignment price minus the premium received for the put sale of $2.32) -OR- is your tax basis $202.05 (the 205 strike/assignment price minus the premium received for the put sale of $2.32 minus the $0.63 loss recognized on the short put or $2.95)?


Although not expressly stated in the Internal Revenue Code or Regulations or even in IRS Publications, a consistent treatment of the short put following the guidelines of making the MTM Election would result in the new basis of AAPL at $202.05.

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Essentially, what has happened is that you have received a tax benefit for the loss in 2025 so now the basis has been decreased by the amount of the loss going into 2026 and, if sold for a gain, the loss would be "recaptured" in a subsequent year.


Again, although there is really no specific guidance on this treatment, consistency would prove advantageous upon IRS audit.

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