Options trading and protecting your profits

[agschmeder]

I just started trading an options portfolio based on the SPY and now am trying to create a tax strategy to protect the eventual profits. Can you steer me in a direction?

[Diane Kennedy]

There are a couple of things to consider when you're doing trading.

First, can you be considered a 'mark to market' dealer? If so, you can get a great tax treatment. Losses would be considered a business loss and gains are capital gains.

This is an election you must make by 4/15 of the year. It has to do with the number of trades you're doing, whether you're investing for short term swings (not long term) and regularly trading throughout the year.

Or you could be considered a straight investor.

Once you know what type of trader you will be considered, you can select the best business structure.

[agschmeder]

No I can't be considered a dealer. I use a broker to do all trades. I subscribe to a news letter which sends auto trades directly to my broker when things need to be done. All I do is monitor my account to ensure trades are completed.

I would be considered a straight investor. Currently we buy weekly and monthly options based on the SPY. We hold them for not more then 3 months currently.

[Diane Kennedy]

At first brush, it sounds like you can not make the mark-to-market election. This is something that you probably should discuss with your own tax advisor. I don't want to give you advice that ends up costing you tax money if I've made the wrong call based on this limited information.