7561. What effect does the purchase of a put have on the underlying stock?Nuco Employeercline212014-06-27T19:04:00Z2014-06-27T19:04:00Z25903363Summit Business Media287394614Site Map/Investments/Options/Equity Options/Stock OptionsTaxFactsDefaultArticle2006-01-04T00:00:00Z120851054-00-tf2.xml1054.00;#1921;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2What effect does the purchase of a put have on the underlying stock?
600.000000000000TaxFactsDefaultArticle2010-01-14T22:01:54ZSBMEDIA\moss-admin7561. What effect does the purchase of a put have on the underlying stock?Because the acquisition of a listed or unlisted put—other than a “married” put (See Q 7566)—is treated as a short sale for the purposes of IRC Section 1233(b) (i.e., the treatment of gains and losses from short sales), the purchase of a put by a taxpayer who holds substantially identical property (e.g., such as the underlying stock) will, at the very least, generally have the effect of cancelling the holding period of the underlying stock, as explained below. In addition, it is possible that the purchase of a put could constitute a constructive sale (i.e., a short sale) of an appreciated financial position if the underlying stock has appreciatedSee IRC Secs. 1259(b)(1), 1259(c)(1)(A). (See Q 7605 to Q 7607).In its provision governing the treatment of short sales,IRC Section 1233. the IRC states that if (1) on the date the put is acquired the purchaser of the put has held the underlying stock for a period of time that is less than the long-term capital gain (or loss) holding period for that stock (See Q 527 and Q 530) or (2) the underlying stock is acquired after the acquisition of the put and on or before the date the put is exercised, sold, or expires, then the holding period of the underlying stock will be deemed to begin on the date the purchaser of the put disposes of the underlying stock, exercises the put, sells the put, or allows the put to lapse, whichever occurs first. Any previous holding period is lost.Rev. Rul. 78-182, 1978-1 CB 265. For this purpose, the exercise or failure to exercise the option will be considered a closing of the short sale.IRC Sec. 1233(b).The holding period of underlying stock held for more than the long-term capital gain (or loss) holding period before the put is acquired is not affected by the rules of IRC Section 1233, but if the transaction is construed as a constructive sale of an appreciated financial position (and assuming no exceptions apply), underlying stock will be treated as sold and reacquired on the date the put is purchased. Thus a new holding period would begin.See IRC Sec. 1259(a).If an investor owns (1) the stock that underlies the put option, (2) stock or securities that are substantially identical to the underlying stock, or (3) other positions that are offsetting with respect to the put option, the purchase of a put may trigger the loss deferral, wash sale, and short sale rules which apply to tax straddles. See Q 7586 to Q 7602 for details. Such a combination of holdings may also trigger a series of constructive sales under IRC Section 1259.See IRC Secs. 1259(e)(1), 1259(e)(3).For the tax treatment of capital gains and losses, see Q 530. For an explanation of the effect of the wash sale rule on transactions involving options, see Q 7533 and Q 7552. For an explanation of the conversion transaction rules with respect to transactions involving the contemporaneous acquisition of a put option and the underlying (or substantially identical) stock, see Q 7604.