Selling a Put

• When you sell -- "write" -- a put option, you give someone the right to sell shares of stock to you at a "strike" price, usually higher than the current market price. The money you receive from the buyer is known as a premium. The option buyer can exercise the put at any time prior to its expiration date, if it is an American-style option, or on the expiration date only, if it is a European-style option. In either case, you are obligated to purchase the shares at the strike price. This is known as an option call. There are three possible outcomes to a put sale: The put option expires, is called or is offset.
  
  

Put Expiration

• If the put option you wrote expires, you keep the premium you received as income. You recognize this income in the year that the put expires, and it is taxed as a short term capital gain. You can add this short term gain to any others you have for the year on Schedule D of the IRS Form 1040. Short term gains are taxed at the same rate as your ordinary income.
  
  

Put Called

• If the option is called -- that is, the holder chooses to sell you her shares -- the option premium is factored in to your total purchase price, or cost basis. You calculate the cost basis by adding the price of the shares to any commissions or fees from the trade and subtracting the option premium. When you sell the shares, you recognize long- or short-term capital gain in the same way you do for any other security: subtract the cost basis, along with fees and commissions related to the sale, from the sale price. If the resulting number is positive, you have a gain. If you held the stock for at least 12 months between purchase and sale, your gain is long-term, and qualifies for a lower tax rate. If not, it is short-term and taxable as ordinary income. If the resulting number is negative, it is a loss, and you can use this loss -- and any others you have -- to offset your taxable gains for the year. Follow the instructions for Form 1040, Schedule D, to do this.
  
  

Put Offset

• If you want to get out of your put obligation prior to the expiration date, you can offset your option. You do this buy purchasing an equal-valued call option with the same strike price and expiration date. The two options effectively cancel each other out, since you could buy back your own shares. Your gain or loss is the difference between the premium you received for writing the put option and the premium you paid to buy the call. These are short-term gains or losses and are taxable at ordinary income rates.