I am posting this as I hope it will help other Australian options traders trading in US options with their tax treatment for ATO (Australian Tax Office) purposes. The ATO provides very little guidance on tax treatment for options trading and I had to do a lot of digging to get to this point. I welcome any feedback on this post.
The Deloitte Report from 2011
My initial research led me to this comprehensive Deloitte report
from 2011 which is hosted on the ASX website. I've been through this document about 20 times and although it's a great report to understand how different scenarios apply, it's still really hard to find out what's changed since 2011.
I am mainly relating myself to the scenario of being an individual
and non-sole trader
(no business set up) for my trading. I think this will apply to many others here too. According to that document, there isn't much guidance on what happens when you're an options premium seller and close positions before they expire.
Note that the ATO sometimes uses the term "ETO" (Exchange Traded Option) to discuss what we're talking about here with options trading.
Also note: The ATO discusses the separate Capital Gains Tax ("CGT") events that occur in each scenario in some of their documents. A CGT event will then determine what tax treatment gets applied if you don't know much about capital gains in Australia.
ATO Request for Advice
Since the Deloitte report didn't answer my questions, I eventually ended up contacting the ATO with a request for advice and tried to explain my scenario: I'm an Australian resident for tax purposes, I'm trading with tastyworks in $USD, I'm primarily a premium seller and I don't have it set up with any business/company/trust etc
. In effect, I have a rough idea that I'm looking at capital gains tax but I wanted to fully understand how it worked.
Initially the ATO respondent didn't understand what I was talking about when I said that I was selling a position first and buying it to close. According to the laws, there is no example of this given anywhere because it is always assumed in ATO examples that you buy a position and sell it. Why? I have no idea.
I sent a follow up request with even more detail to the ATO. I think (hope) they understood what I meant now after explaining what an options premium seller is!
First, I have to consider translating my $USD to Australian dollars. How do we treat that? FX Translation
If the premium from selling the options contract is received in $USD, do I convert it to $AUD on that day it is received?
Subsection 960-50(6), Item 5 of the Income Tax Assessment Act 1997 (ITAA 1997) states the amount should be translated at the time of the transaction or event for the purposes of the Capital Gains Tax provisions. For the purpose of granting an option to an entity, the time of the event is when you grant the option (subsection 104-20(2) ITAA 1997).
This is a very detailed response which even refers to the level of which section in the law it is coming from. I now know that I need to translate my trades from $USD to $AUD according to the RBA's translation rates
for every single trade. But what about gains or losses on translation?
There is one major rule that overrides FX gains and losses after digging deeper. The ATO has a "$250k balance election
". This will probably apply to a lot of people trading in balances below $250k a lot of the FX rules don't apply. It states:
However, the $250,000 balance election broadly enables you to disregard certain foreign currency gains and losses on certain foreign currency denominated bank accounts and credit card accounts (called qualifying forex accounts) with balances below a specified limit.
Therefore, I'm all good disregarding FX gains and losses! I just need to ensure I translate my trades on the day they occurred. It's a bit of extra admin to do unfortunately, but it is what it is.
This is the scenario where we SELL a position first, collect premium, and close the position by making an opposite BUY order. Selling a naked PUT, for example. What happens when you open the position?
The option is grantedCGT event D2 happens when a taxpayer grants an option. The time of the event is when the option is granted. The capital gain or loss arising is the difference between the capital proceeds and the expenditure incurred to grant the option.
This seems straight forward. We collect premium and record a capital gain. What happens when you close the position?
Closing out an optionThe establishment of an ETO contract is referred to as opening a position (ASX Explanatory Booklet 'Understanding Options Trading'). A person who writes (sells) a call or put option may close out their position by taking (buying) an identical call or put option in the same series. This is referred to as the close-out of an option or the closing-out of an opening position.
CGT event C2 happens when a taxpayer's ownership of an intangible CGT asset ends. Paragraph 104-25(1)(a) of the ITAA 1997 provides that ownership of an intangible CGT asset ends by cancellation, surrender, or release or similar means.
CGT event C2 therefore happens to a taxpayer when their position under an ETO is closed out where the close-out results in the cancellation, release or discharge of the ETO.
Under subsection 104-25(3) of the ITAA 1997 you make a capital gain from CGT event C2 if the capital proceeds from the ending are more than the assets cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base.
Both CGT events (being D2 upon granting the option and C2 upon adopting the close out position) must be accounted for if applicable to a situation.
My take on this is that the BUY position that cancels out your SELL position will most often simply realise a capital loss (the entire portion of your BUY position). In effect, it 'cancels out' your original premium sold, but it's not recorded that way, it's recorded as two separate CGT events - your capital gain from CGT event D2 (SELL position), then, your capital loss from CGT event C2 (BUY position) is also recorded. In effect, they net each other out, but you don't record them as a 'netted out' number - you record them separately
From what I understand, if you were trading as a sole tradecompany then you would record them as a netted out capital gain or loss, because the trades would be classified as trading stock
but not in our case here as an individual person trading options. The example I've written below should hopefully make that clearer. EXAMPLE:
Trade on 1 July 2020: Open position
- SELL -1 SPY 85 PUT, exp 30 August 2020
- Collect Premium USD$1 per unit, and brokerage USD$5
- = USD$100 premium collected, minus USD$5
- = Net amount of USD$95 collected
- FX Translation rate on the date of the trade: AUD $1.00 = $USD 0.70
- Net Premium Collected in $AUD
- = USD$95 x (1/.7)
- = AUD$135.71
- CGT Event D2 triggered and a capital gain of $135.71 is recorded
Trade on 15 July 2020: Close position
- BUY 1 SPY 85 PUT, exp 30 August 2020
- Pay Premium $0.50 per unit, and brokerage $5
- = $50 premium paid, plus $5
- = Net amount of USD$55 paid
- FX Translation rate on the date of the trade: AUD $1.00 = $USD 0.60
- Net Premium Collected in $AUD
- = USD$55 x (1/.6)
- = AUD$91.66
- CGT Event C2 triggered and a capital loss of $91.66 is recorded
We can see from this simple example that even though you made a gain on those trades, you still have to record the transactions separately, as first a gain, then as a loss. Note that it is not just a matter of netting off the value of the net profit collected and converting the profit to $AUD because the exchange rate will be different on the date of the opening trade and on the date of the closing trade we have to record them separately.
What if you don't close the position and the options are exercised?
The option is granted and then the option is exercisedUnder subsection 104-40(5) of the Income Tax Assessment Act 1997 (ITAA 1997) the capital gain or loss from the CGT event D2 is disregarded if the option is exercised. Subsection 134-1(1), item 1, of the ITAA 1997 refers to the consequences for the grantor of the exercise of the option.
Where the option binds the grantor to dispose of a CGT asset section 116-65 of the ITAA 1997 applies to the transaction.
Subsection 116-65(2) of the ITAA 1997 provides that the capital proceeds from the grant or disposal of the shares (CGT asset) include any payment received for granting the option. The disposal of the shares is a CGT event A1 which occurs under subsection 104-10(3) of the ITAA 1997 when the contract for disposal is entered into.
You would still make a capital gain at the happening of the CGT event D2 in the year the event occurs (the time the option is granted). That capital gain is disregarded when the option is exercised. Where the option is exercised in the subsequent tax year, the CGT event D2 gain is disregarded at that point. An amendment may be necessary to remove the gain previously included in taxable income for the year in which the CGT event D2 occurred.
This scenario is pretty unlikely - for me personally I never hold positions to expiration, but it is nice to know what happens with the tax treatment if it ultimately does come to that.
What about the scenario when you want to BUY some options first, then SELL that position and close it later? Buying a CALL, for example. This case is what the ATO originally thought my request was about before I clarified with them. They stated:
When you buy an ETO, you acquire an asset (the ETO) for the amount paid for it (that is, the premium) plus any additional costs such as brokerage fees and the Australian Clearing House (ACH) fee. These costs together form the cost base of the ETO (section 109-5 of the ITAA 1997). On the close out of the position, you make a capital gain or loss equal to the difference between the cost base of the ETO and the amount received on its expiry or termination (subsection 104-25(3) of the ITAA 1997). The capital gain or loss is calculated on each parcel of options.
So it seems it is far easier to record debit trades for tax purposes. It is easier for the tax office to see that you open a position by buying it, and close it by selling it. And in that case you net off the total after selling it. This is very similar to a trading shares and the CGT treatment is in effect very similar (the main difference is that it is not coming under CGT event A1 because there is no asset to dispose of, like in a shares or property trade).
Other ATO Info (FYI) The ATO also referred me to the following documents.
They relate to some 'decisions' that they made from super funds but the same principles apply to individuals they said.
The ATO’s Interpretative Decision in relation to the tax treatment of premiums payable and receivable for exchange traded options can be found on the links below. Please note that the interpretative decisions below are in relation to self-managed superannuation funds but the same principles would apply in your situation [as an individual taxpayer, not as a super fund]. Premiums Receivable: ATO ID 2009/110
- Key quote from this decision: CGT Event D2 will apply on the writing of an ETO by the Fund. The Fund as grantor of the option will make a capital gain (or loss) of the difference between the capital proceeds (that is, the premium receivable) and the cost of granting the option (for example, brokerage fees) at the time the option is granted
- My take on this is that you will realise a capital gain on issuing of the selling position. I don't see how you could realise a capital loss in that scenario? Or maybe if you sell a position and the brokerage is so high that it outweighs the premium received (a dumb trade) then that would be a capital loss (a rare scenario).
- Premiums Payable: ATO ID 2009/111
- Key quote from decision: When the Fund opens a position by buying an ETO, no immediate taxation consequences arise. CGT Event C2 will happen to the Fund when its position under an ETO is closed out where the close-out results in the cancellation, release or discharge of the ETO
- Don't forget to declare your trades on your tax return and keep a nice spreadsheet
- Keep track of the exchange rates for each day you make a trade. You could do as you go and check the RBA exchange rates website for the daily number, or just do it all at once at the end of the financial year
- Finally - I recommend ensuring that you save a portion of your income to pay the capital gains tax at the end of the year so you don't have to withdraw it from your portfolio and pay exchange rate fees to convert it back to Australian dollars. It will depend on your marginal tax rate what that percentage will work out to be in the end.
I'm doing a tribute to the 24 days of Christmas by going over the financial statements of 24 companies that are considered downrange, speculative, and just plain high risk.
The legal cannabis industry already has a ton of risk in it - but this stuff - is only for thrill seekers. All opinions are my own, and certainly not a recommendation for or against any of them, or to buy or sell.
I've limited myself to 45mins to each, and kept to most recent financial statements
. You'll likely know more about the company than me if you're following them. This is only my reactions with a brief commentary about what I see in their latest financial statements.
I haven't been consistent in following them all over the past year: some I have, others not. Ah, it's that time of the year again.
The smell of chestnuts roasting....the sights of snack tables filled with shortbread & egg nog....of lights and decorations and presents....and that time when the elves revisit the route on their 2017 Dive Bar Pub Crawl.
Some of the share prices have been up and down faster than a toddler's mood. Let's take a look, and see who has been 'naughty' or 'nice'.
MPX - MPX Bioceutical
Price then: $0.40 - Price Now: $0.87
Recently, I toured their Nevada facility, and wrote their financials up here, and you can find the grow op writeup here. Gonna cheat a little this year, and refer to that.
KALY - Kalytera Therapeutics, Inc.
Price then: $0.29 - Price Now: $0.065
Ugh. Just ugh. As I said last year, pharma is outside of my wheelhouse, as does financials related to them. Anyhow, I still think the financials suck.
- That very expensive Talent Bio pickup wasn't so expensive after all. Bottom fell out of a contingency payment, expected liability turned into income. Presto!
- Note 5. Reads like the script from a Mexican soap opera.
- If you decide to read Note 5, have a box of tissues, a spreadsheet, a bottle of rum, and a bowl of popcorn handy. You might have need of all four during it. Or maybe just the rum alone.
- That $12MM write-down of expected contingent liabilities in Talent landed them $0.01/share in diluted EPS.
- Woooo! They're profitable!!!!..???....
- First time I've ever seen income derived from G&A.
- A true Dive Bar HOF nominee: the 'secured debenture' remains. Note 7.
- Best reading yet: Beetlebung Pharma Ltd. (no, I didn't make that up). Find out all about the brand spanking new contingent liabilities in Note 9.
GLH - Golden Leaf Holdings
Price then: $0.28 - Price Now: $0.13
While searching for a reason for the merger cancellation, I came across a Terra Tech comedy sketch. Sadly, there is not even a mention of the merger 'oopsy' on their website. Seriously, if space becomes available in the Crawl, Terra Tech is first in line.
- Woot! Announced a merger with Terra Tech! Great fit! Complimentary businesses!
- Fast forward 5 weeks, 'merger' off. A one line press release that says nothing else.
- My new favorite: 'Unsecured Convertible Subordinated Debenture Units'. They raised $8MM with them.
- Which, happened to be closing 2 weeks after the merger announcement.
- That retinal burn I got last year was prevented. I invested in a pair of auto-darkening welding glasses. Smart call if you're thinking of reading any of these financials.
- Some of these notes shine brighter than a 50 amp arc weld.
- Break even business on sales/cogs. Guess that's a positive. They were negative a year ago. At this rate, by 2026, they might have a positive gross margin.
- $220k in intangible customer relationships appeared, then disappeared during the period. Yet total customer relationships remain unchanged at $1.512MM. Nyuk-nyuk.
- Spoke too soon: the welding glasses reaction time wasn't quick enough to dim the intensity of Note 17. All I can see is spots right now.
- Man, life's too short for this shit.
As for GLH....well....caveat your fucking emptor. Eye bleach is/was too gentle a term for this outfit's fins.
Price then: $0.80 - Price Now: $0.32
Through disclosure, we know that they pay $25 an hour, a $500 xmas bonus, and 250,000 stock options. Which is pretty good. Qualification is that you have to be a close family member of the CEO, and buy $1,400 in product.
- G&A and SBC far in the lead of reported operations.
- $8MM write-up of warrant liability. Note 10. Yeep.
- Got $2MM in a settlement with Jacob Securities. Winning!
- Clone shipper's sales have been 'nominal'.
- Of the $1.3MM they paid for the shipper, 1.1MM of it allocated to patents and trademarks.
- Lord God above, protect us. Note 10 here could be a contender with some notes in GLH for retinal burn.
- Good itemization of G&A. Hey, gotta say something nice. It's xmas after all.
- Ok, gonna take that back. Note 15 detail 3 pages (3!) of related party transactions. I've never seen any company in my life require that much.
- $5.5MM in loss carry forwards a positive. If they ever make money that is. Which, at a negative margin and a $12MM loss this year.....
Well, there's many different fish in the sea. But I do suspect that this isn't a fish, it's just a sea slug.
EAT (Nutritional High)
Price then: $0.22 - Price Now: $0.18
Ok. They have stuff littered everywhere, and it doesn't look like any of it is worth anything. Oh, wait, that's what I said last year.
- 40% of all assets intangibles/goodwill. Just like an old favorite xmas song we all know the words to.
- S/E deficit doubled, now up to $20MM
- Gross margin positive. Well then, that is a positive.
- Note 23. Holy Hannah. These guys show THC how it's really done in related party transactions. $5MM of the $10MM in total op expenses for the year to related parties. THC? Pffft. Amateurs.
- $80k in forex losses. Has me pining for the fjords of last year's crawl.
- 52 pages of statements. Totally fucking merciless. Sociopathic in fact.
- I'd need a hyper-cluster of blade servers to calculate the optionality in Note 21 alone. My apologies, I don't have one. Maybe the elves will find one second hand.
- Seriously, the complexity of these statements rivals CGC.
Realistically, to get a good handle on this thing, one would need an Act of God. I waited for a little while, but it didn't happen. On to.....
RVV - Revive Therapeutics
Price then: $0.30 - Price Now: $0.09
Heavy in options, some design around clinical trials. Nothing much else stands out. Again, pharma and value hunting in research ain't something I know much about. The entire assumption in here is that they'll actually put out someday, or get taken out by a larger fish (hopefully for more than the $10MM they've dumped into it). Anyone investing in stuff this downrange, better have your scope sighted in.
- Assets: nothing.
- Liabilities: nothing.
- Share Capital: deficit of $10MM.
- Office expenses: a lean mean $19k. Whoppingly eclipsed by $24k in research costs.
- $150k in salaries.
- Thankfully, this thing is only 15 pages long. Given it looks like a one person shop operating out of a phone booth, probably also explains it.
Or perhaps you know that the FDA's granting of orphan drug status for CBD in the prevention of ischemia and reperfusion injury resulting from solid organ transplantation is just the shot in the arm this company needed. If you do, please keep it to yourself.
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