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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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
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The short puts were assigned stock because they were in-the-money at expiration.
What is the new basis of the stock?
Example
Let’s say you sold an AAPL Jan 15 2016 105 put on 12/11/15 for $1.32 when AAPL was at $113.23.
On 12/31/15 AAPL closes at $105.36 and the short put is valued at $1.95 meaning that to close that position you would sustain a $0.63 loss (STO of $1.32 followed by BTC of $1.95)
With the MTM election in place, that is a deemed “close” of the position at $1.95 and the loss is recognized on your tax return as a taxable transaction.
Now, your new “basis” in the short put is $1.95.
At option expiration AAPL closes at $97.13 meaning that your 105 put is in-the-money and you are assigned 100 shares of AAPL at $105.00.
Is your tax basis $103.68 (the 105 strike/assignment price minus the premium received for the put sale of $1.32) -OR- is your tax basis $103.05 (the 105 strike/assignment price minus the premium received for the put sale of $1.32 minus the $0.63 loss recognized on the short put or $1.95)?
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 $103.05.
Again, although there is really no specific guidance on this treatment, consistency would prove advantageous upon IRS audit.