CGT calculations on US Options (not CFDs)

[ki1ian]

Hi,

Can anyone shed some light on how to correctly calculate capital gains for US style option spreads (ie can be exercised at any time before expiry) and how losses may be accounted for?

HMRC couldn't help over the phone and advised to put the questions in writing to the CGT compliance office in Glasgow but I doubt I'm not the only member of this forum trading US options and filing my own self-assessment forms...

The CGT and savings and invesment manuals on the topic http://www.hmrc.gov.uk/manuals/cgmanual/CG56200.htm and http://www.hmrc.gov.uk/manuals/saimmanual/SAIM7100.htm could do with some examples and referred to the Income Tax Act which is even harder to decipher: http://www.legislation.gov.uk/ukpga/2005/5/part/4/chapter/12.

So to give a couple of scenarios (prices are in USD and would be converted to GBP using the exchange rate on the day of the transaction):

Scenario 1 (vertical spread held till expiry):

Scenario 2 (straddle closed before expiry):

Scenario 3 (straddle with one leg assigned on expiry and closed later)

Scenario 4 (single put option):

Scenario 5 (multiple transactions on the same underlying symbol made within hours/days):

What qualifies as "guaranteed returns"? There are no guarantees in this game but options can be defended and are there any option spreads which might qualify?

Can losses or commission costs be used to offset gains (either against the profits made in trading options or from alternative instruments such as shares / futures / currency pairs)?

Re Losses, the Income Tax Act act states:
For the treatment of the losses for capital gains tax purposes, and how TCGA 1992 applies where a profit arises or a loss is made from a deemed disposal under section 564(4), see sections 148A to 148C of that Act:

So here's section 148: Traded options: closing purchases

(1)This section applies where a person (“the grantor”) who has granted a traded option (“the original option”) closes it out by acquiring a traded option of the same description (“the second option”).
(2)Any disposal by the grantor involved in closing out the original option shall be disregarded for the purposes of capital gains tax or, as the case may be, corporation tax on chargeable gains.
(3)The incidental costs to the grantor of making the disposal constituted by the grant of the original option shall be treated for the purposes of the computation of the gain as increased by an amount equal to the aggregate of—
(a)the amount or value of the consideration, in money or money’s worth, given by him or on his behalf wholly and exclusively for the acquisition of the second option, and
(b)the incidental costs to him of that acquisition.
(4)In this section “traded option” has the meaning given by section 144(8).

But honestly I'm none the wiser.

Thanks in advance

 

[random12345]

I'm very tired so forgive any English issues here. I don't specialise in options by any stretch of the imagination, but you only need to worry about the artificial transaction rules (deemed disposal - recategorisation of income) if you have something going on along the lines of this (which would require you to have serious capital and assume muchos liability):

http://www.hmrc.gov.uk/manuals/saimmanual/SAIM7030.htm

Generally for UK purposes you need to worry only about the date you received any option income (for tax year purposes), gross income, gross costs and yes you can deduct commission from each disposal as a capital expense (whether a gain or a loss - so comms will either decrease the gain or increase the loss). Your SA108 will pool all capital losses against capital income automatically so yes losses on shares etc would net against gains on options - they do not get separated into baskets for different tranches of capital income when it comes to the final stage.

You don't need to file CGT pages if your capital gains are below £10,600 and your total capital disposals are below £42,400, but obviously if you've made a loss then you'll want to file to have that loss carryforward next year.

 

[ki1ian]

That's helpful thank you.

The example in SAIM7030 is one option spread combination - although I haven't used that particular combination (box spread), I believe
Section CG55400 gives a more accurate reflection of these financial instruments: http://www.hmrc.gov.uk/manuals/cgmanual/cg55400.htm

And in CG55445 http://www.hmrc.gov.uk/manuals/cgmanual/cg55445.htm Scenario3 is an example of an Option exercised. Scenarios 2,4&5 of Options sold. Scenario 1 is an example of Options "abandoned or lapsed". For all of these scenarios is the capital gain / loss simply calculated by (gross p/l - commission costs) or are there artificial transaction / timing / indexation rules which need to be taken into consideration?

And re converting the dollar amount into GBP, would it correct to convert the cost (or credit) of each transaction into GBP (instead of the nominal value of the option)? So to use Scenario 1 as an example:

Becomes:

Thanks

 

[jontyxxxx]

Just filed my UK 2012/2013 tax return including options (netted against stocks, UTs and ITs) and I only account for the option gain/loss when made - either on expiry or when closed. In my view when you receive/pay the cash is irrelevant since there is no "disposal" until expiry or sale to close. All a very arcane area and HMRC guidance poor. I convert foreign trades on the day bought/sold so any exchange gain loss is included in the option gain loss - exactly what you are doing.
John

 

[random12345]

That's helpful thank you.

The example in SAIM7030 is one option spread combination - although I haven't used that particular combination (box spread), I believe
Section CG55400 gives a more accurate reflection of these financial instruments: http://www.hmrc.gov.uk/manuals/cgmanual/cg55400.htm

And in CG55445 http://www.hmrc.gov.uk/manuals/cgmanual/cg55445.htm Scenario3 is an example of an Option exercised. Scenarios 2,4&5 of Options sold. Scenario 1 is an example of Options "abandoned or lapsed". For all of these scenarios is the capital gain / loss simply calculated by (gross p/l - commission costs) or are there artificial transaction / timing / indexation rules which need to be taken into consideration?

And re converting the dollar amount into GBP, would it correct to convert the cost (or credit) of each transaction into GBP (instead of the nominal value of the option)? So to use Scenario 1 as an example:

Becomes:

Thanks

That's odd, seeing this bumped up the list, I realised I never responded to this but thought I had, referencing the manual and everything.

Anyway yes, simply report proceeds (P/L) less costs in all of these instances when a disposal occurred and convert these to GBP at the spot closing rate on the day.