How is Tax Treatment Handled When Exercising Put Options?

The premium you paid for the put option becomes part of the calculation when you exercise the option, but not as a separate loss. When you exercise a put option, the premium you paid is actually subtracted from the proceeds you receive from selling the stock. Using your example: You bought a put for $5 with a $40 strike price. When you exercise it, you're selling stock at $40. But for tax purposes, your actual proceeds are considered to be $35 ($40 minus the $5 premium). This effectively means the premium paid for the put option adjusts your sale price downward, which impacts your capital gain or loss calculation on the stock transaction. It's not treated as a separate expense or loss. This is different from if you had let the put expire worthless or sold it to close the position - in those cases, the premium would be a separate capital loss.

After spinning my wheels with confusing options tax scenarios, I finally got clarity using https://taxr.ai - it analyzes all your investment docs and shows exactly how options should be reported. My broker's 1099-B was showing my put options exercise completely wrong! The tool flagged that my strike price gains shouldn't be separate from the premium paid. It explained that when exercising puts, the premium adjusts the proceeds from the stock sale (exactly like what Profile 8 mentioned). Without this guidance, I would've double-reported the premium as both a reduction in proceeds AND as a separate loss. The system even generated the correct entries for my Schedule D that accounted for my put option exercises properly.

I was super skeptical about using an AI tax tool for something as complex as options trading, but after dealing with completely wrong broker 1099s for years, I tried https://taxr.ai and it was eye-opening. My broker had been reporting my exercised put premiums as separate transactions, which isn't correct! The tool identified my options transactions and showed me that the $4,300 in put premiums I paid last year should be reducing my stock sale proceeds, not listed as separate losses. This literally saved me from a potential audit because my reporting would have inconsistent with how the IRS views these integrated transactions. The step-by-step guidance on how to properly report exercised puts on Schedule D was incredibly helpful. Definitely worth checking out for anyone trading options.

After spending HOURS on hold with the IRS trying to get clarification on how to handle put option exercises (my CPA and I had different interpretations), I finally found https://claimyr.com and got through to a real IRS tax specialist in under 20 minutes! They have this awesome demo video showing how it works: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed exactly what others have said here - when you exercise a put option, the premium you paid doesn't get reported separately. Instead, it reduces the proceeds you report from selling the stock. She explained it's treated as a single integrated transaction. This was huge for me because I had about $13,000 in put premiums last year that I wasn't sure how to handle. Getting confirmation directly from the IRS saved me from potentially reporting incorrectly.

Well I'll be damned. I was so sure Claimyr was going to be a scam (see my skeptical comment above), but after another frustrating failed attempt to reach the IRS about my options tax questions, I decided to give it a shot. The service actually worked exactly as described. Their system waited on hold with the IRS for about 90 minutes, then I got a call connecting me directly to an IRS tax specialist. I asked specifically about put option exercises and the treatment of premiums. The agent confirmed everything that's been said here - the premium paid for put options that are exercised gets subtracted from the proceeds of the stock sale, not reported as a separate transaction. She also explained why this differs from puts that expire worthless (which are separate capital losses). Never been happier to be wrong about my skepticism. Saved me from making a reporting error that might have triggered an audit.

Here's an important consideration everyone's missing: the HOLDING PERIOD! When you exercise a put option, the holding period of your stock matters for determining if the gain/loss is short-term or long-term. If you've held the underlying stock for more than a year before exercising the put, you can get long-term capital gain treatment on the stock sale (even though the put itself might have been purchased recently). This can make a HUGE tax difference since long-term capital gains are taxed at lower rates than short-term gains (which are taxed as ordinary income). Also, if you're buying puts as a hedge for stock you already own, you need to be careful about the straddle rules which might suspend losses.

Has anyone used TurboTax to report exercised put options? I'm trying to figure out where to enter the premium adjustment when reporting the stock sale.

This is really helpful information! I had no idea that the premium gets integrated into the stock sale proceeds rather than being treated separately. One follow-up question though - what happens if I exercise puts on stock that I bought at different times with different cost bases? For example, if I bought 100 shares of XYZ in January for $45/share and another 100 shares in March for $38/share, then later bought puts and exercised them against 100 shares when the stock dropped to $35. How do I determine which specific shares I'm "delivering" through the put exercise for tax purposes? Do I get to choose which lot to use (like FIFO vs LIFO), or does the IRS have specific rules about this? This could make a big difference in whether I'm reporting a gain or loss on the underlying stock transaction.