How are USA share options taxed

[jellytops]

Hi,
I am a UK citizen and live in UK.
I want to invest in USA covered calls, i.e. buy and sell shares, and sell options on the same USA shares. Normally, I would probably own the shares for short periods, i.e. between 1 to 6 months.
Any profits on the buying and selling of shares are taxable and are treated as capital gains for taxable purposes. (for 2009/10 I think the allowance is 10,100 uk pounds).
However, I cannot find out how gains on share options are treated. I even phoned the tax office and they said write them a letter! Does anyone know if options are treated as capital gains or as ordinary income?

Regards, Jellytops

[jellytops]

The last line should of said .....Does anyone know if the profits from options are treated as capital gains or as ordinary income?

Regards, Jellytops

[mullet]

In very broad terms, if share options are from an employment then profits are taxed as employment income. For instance, you have an option to buy 100 shares worth £8 for £3 each. The "benefit" 100 x £5 = £500 is taxed as employment income. When you sell the shares, any profit or loss is a capital gain or loss.

If you are dealing in share options and there is no employment involved, then it is all capital. Section 21 TCGA 1992 specifically lists options as assets for CGT purposes. (Income tax takes priority over capital gains tax, hence the difference if an employee exercises options). Also look at Section 144 TCGA 1992, which links the grant of an option with the exercise as a single transaction and also talks about losses on options.

[jellytops]

Hi, Thanks to msp for that information. I found and read the two sections you pointed out. You must obviously be some kind of expert on this sort of thing. I found it difficult to understand it fully, but you seem to be correct in what you say.

Just to clarify what I am proposing to do is the following:

Buy say 100 shares in XYZ company @ $11 each = $1100 cost.
Sell an (call) option on the same shares (at say $10) for a price of say $1.6 each, for completion on 19 March. (this gives me a $160 fee)
This gives the other person the right but not the obligation to buy my shares off me on or before March 19 for $10 each ($1000 total)

What normally (but not always) would happen is that, on 19 March they would buy my shares off me for $10 ($1000 total)

I would lose $1.0 on the buying and selling the shares and gain $1.6 0n selling the option. Overall I would make a profit of $0.6 x 100 = $60.

[mullet]

Buy say 100 shares in XYZ company @ $11 each = $1100 cost. No CG implications yet, apart from acquiring assets.

Sell a (call) option on the same shares (at say $10) for a price of say $1.6 each, for completion on 19 March. (this gives me a $160 fee). This is a disposal. Consideration $160 less any costs of disposal. No base cost.
This gives the other person the right but not the obligation to buy my shares off me on or before March 19 for $10 each ($1000 total).

What normally (but not always) would happen is that, on 19 March they would buy my shares off me for $10 ($1000 total). This is a disposal of 100 shares, and is treated as a single disposal (with the granting of the option) by virtue of Section 144 (2) and (3).

I would lose $1.0 on the buying and selling the shares and gain $1.6 on selling the option. Overall I would make a profit of $0.6 x 100 = $60. So treated as a single disposal (and ignoring any minor costs) you have sold 100 shares for $1,160 less base cost $1,100 = gain $60. Yes, all agreed. The disposal arises (if different) in the year that the shares are sold. If you have paid CGT on the grant of the option in an earlier year it is "refunded" by HMRC creating a credit ... the original return is not amended.

[jellytops]

Hi again,
Thanks for the explanation.
I assume the $60 profit would be classed as capital gains tax? and as such, I would pay no tax unless I made more than £10,100 (CGT allowance 2009/10) in a year.

Regards, Jellytops

[mullet]

Yes, you would pay CGT on gains which exceed the annual exempt amount.
TBH I thought you were using illustrative figures only and that $60 might be $60,000 or something, which is why I ignored the AEA.

[jellytops]

Hi,
Yes you were correct, I was using the $60 as an example only.
Of course I would expect to make more profits than that, but most probably less than 10100.
I have dealt in shares (UK) for many years. Now I keep them mainly for the dividends (not very good at present) as I am 71 and retired.
I went on a investment course some months ago and, after practising on a paper account for the last 4 months, I reckon I can make a reasonable return from "çovered calls" on USA stocks.

Thanks again for your valuable time and advice. I am glad I will not have to pay tax.

Regards, John long