# How to Calculate Taxes From Credit Spreads

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A credit spread is created when you sell options at one strike price and buy identical options at a different strike price. If your proceeds from the sale of the first leg exceed the amount spent to purchase the second leg, you receive a net credit. To calculate taxes on the credit spread, each leg must be considered and reported individually.

Determine your cost basis for each leg. For the first leg where an option is written, or sold, your basis is the total premium amount that you received as payment. For the second leg where an option is purchased, your basis is the total amount that you paid for the option.

Determine the gain or loss on the first leg. This depends upon whether the purchaser allows the option to expire, the purchaser exercises the option, or you purchase an offsetting option in a closing transaction.

If the purchaser allows the option to expire, the entire premium you originally received is reported as a short-term gain, even if the duration of the option is longer than 12 months.

If you wrote a put option and the purchaser exercises the option, you're obligated to purchase shares. You reduce the tax cost basis of those shares by the amount of premium you originally received. If you wrote a call option and the purchaser exercises the option, you're required to sell shares. You must add the premium you originally received to the proceeds from the sale of stock.

If you purchase an offsetting option to close the option that you wrote, your taxable gain or loss is the difference between the premium you received for writing the transaction and the premium you paid for the offsetting option.

Determine the selling price of the second leg. This is the amount you received when you sold the option in the market to close the leg. If you allowed the option to expire worthless, note “Expired” in Column “d” of Schedule D of IRS Form 1040.

Determine the gain or loss on the second leg by subtracting the selling price of the second leg from your cost basis. If you allowed the option to expire worthless, your capital loss is the entire amount you originally paid for the option.

#### Tips

• Although you may consider a credit spread as one option instrument, the IRS considers each leg as an individual transaction. Consider the character of each transaction when calculating your capital gain or loss.