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MTM and Short Puts

Short Put Assignment under MTM Election

So you have made the MTM Election and are now either calculating the IRC Sec 481(a) adjustment or the year-end MTM adjustment and two situations exist:

  1. You hold short puts that were sold at a price that is significantly different at the adjustment date (12/31/XX) than when you originally sold them, and

  2. The short puts were assigned stock subsequent to the year-end adjustment because they were in-the-money at expiration.

What is the basis of the stock?


Let’s say you sold an AAPL Jan 15 2021 130 put on 12/24/21 for $1.32 when AAPL was at $133.25.

On 12/31/21 AAPL closes at $132.69 and the short put is valued at $1.95 meaning that to close that position you would sustain a $0.63 loss (STO of $1.32 followed by BTC of $1.95)

With the MTM election in place, that is a deemed “close” of the position at $1.95 and the loss is recognized on your tax return as a taxable transaction.

Now, your new “basis” in the short put is $1.95.

At option expiration on 1/15/2022 AAPL closes at $127.14 meaning that your 130 put is in-the-money and you are assigned 100 shares of AAPL at $130.00.

Is your tax basis $128.68 (the 130 strike/assignment price minus the premium received for the put sale of $1.32) -OR- is your tax basis $128.05 (the 130 strike/assignment price minus the premium received for the put sale of $1.32 plus the $0.63 loss recognized on the short put or $1.95)?

Although not expressly stated in the Internal Revenue Code or Regulations or even in IRS Publications, a consistent treatment of the short put following the guidelines of making the MTM Election would result in the new basis of AAPL at $128.05.


Remember that with the MTM election in place you are deemed to have closed all positions at year-end.  So, in this example, you have a deemed close (BTC) of the short AAPL put at $1.95 which would translate into a LOSS of $0.63 (STO of $1.32 and deemed BTC of $1.95).  You receive a tax benefit for that loss in the prior year so that loss is included as an additional credit or "sale" to the short put.

Again, although there is really no specific guidance on this treatment, consistency would prove advantageous upon IRS audit.

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