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Chapter 2. Option Basics > The Importance of Professional Advice and Tax Planni...

The Importance of Professional Advice and Tax Planning

With the potential tax consequences in mind, you need to consult with an experienced tax professional before writing calls, to ensure that you don't create higher tax liabilities. Be sure that you know the tax rules of a particular strategy before you proceed.

One possible planning strategy is the intentional creation of short-term profits. This is a way to close out positions with option premium and capital gains combined, without regard to tax consequences. This works when you have a carryover loss to absorb. The annual limitation on deduction of net losses is $3,000. Many investors have far greater losses, with little hope of ever using the entire loss. But when you have such a loss carryover, you can apply it against current-year gains. That changes the entire planning question. You may welcome profitable short-term profits as long as they are offset by the carryover. It enables you to take profits this year and free up capital without having to pay as much as 35 percent in taxes.


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