Tax Exposure for Buying Puts Against a Large Gain

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Buying puts against a large gain is a tax-driven strategy that could potential reduce or defer certain tax consequences. Find out about tax exposure for buying puts against a large gain with help from a registered investment adviser in this free video clip.

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Hi, I'm Benjamin Lupu, certified financial planner with Kensington AMI registered investment adviser with tax exposure for buying puts against a large gain. This subject involves a tax-driven option strategy. If you have a sizable gain in a stock but you are concerned that taking the profit may incur a taxable gain, you could use option strategies to reduce or defer certain tax consequence. One example is to buy a put option contract corresponding to a gain in a stock that is currently taxable at short-term capital gains rates. Say you own XYZ stock and have made a gain of 50% in less than 12 months. Taking the profit could expose the stock owner to short-term capital gains tax usually taxed at considerably higher rates than long-term capital gains held more than one year. Purchasing the correctly corresponding XYZ put option with the correct amount of time remaining on the contract would allow the holder to keep XYZ stock until the gain becomes long term saving considerable tax for the holder in the process. Of course there is a cost to purchasing the put options, but if the short-term capital gains tax versus the long-term capital gains tax liability exceeds the cost of the options, the strategy may be worth doing. There are many other option strategies as well. Options can be very complex and require a high level of skill and experience to use properly. With tax exposure for buying puts against a large gain, I'm Benjamin Lupu, certified financial planner with Kensington AMI Registered Investment Adviser.

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