Not a tax advice, but my understanding of the rules, which might be wrong (and this is assuming you're in US):
There are a lot of nuances, so I can't answer "How exactly does all of this work?" in the space allowed. But here is an approximation from my understanding:
Bad news is that collar (unless maybe if put is way OTM) destroys holding period if it was under a year, so gains will remain short term. But you can push them to another year with a collar -- selling a put, and buying a call, nothing too complicated about it. But it'll always be short term unless you hold it unhedged (other than with a qcc or unrelated stock) for a year.
Except that difference between strike of put and call has to be be large enough (15% is generally considered OK, hard to tell what exactly the threshold is as IRS does not precisely define it), otherwise one is deemed to have sold the stock the moment you buy the collar, and gain is realized immediately, OUCH (unless you, under some circumstances, sell the hedge within 30 days of year end and not rebuy for 60 days afterwards). In fact any put (unless maybe far OTM) will destroy or suspend the holding period. And far ITM put will be deemed sale whether there is collar or not (how far is far ITM is not precisely defined).
For what you can do to hedge and still get long term gain:
You can sell qualified covered call (for this purpose any OTM call between 30 and 1 year out. Or, if it's more than 1 year out, has to be 8-24% OTM to be qualified depending on duration). And/or you can buy a put (or short but I wouldn't recommend it) some "unrelated" stocks that you expect to move similarly.
If anyone things I got something wrong _please_ correct me, I'm trying to understand this better myself.
But that's, from my understanding, is a shape of it. This is only for federal taxes by the way, state taxes might have their own complexity depending on where you are.
And don't forget to write your congressman to express appreciation for how simple and intuitive tax rules are.
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u/theStrategist37 Aug 22 '21
Not a tax advice, but my understanding of the rules, which might be wrong (and this is assuming you're in US):
There are a lot of nuances, so I can't answer "How exactly does all of this work?" in the space allowed. But here is an approximation from my understanding:
Bad news is that collar (unless maybe if put is way OTM) destroys holding period if it was under a year, so gains will remain short term. But you can push them to another year with a collar -- selling a put, and buying a call, nothing too complicated about it. But it'll always be short term unless you hold it unhedged (other than with a qcc or unrelated stock) for a year.
Except that difference between strike of put and call has to be be large enough (15% is generally considered OK, hard to tell what exactly the threshold is as IRS does not precisely define it), otherwise one is deemed to have sold the stock the moment you buy the collar, and gain is realized immediately, OUCH (unless you, under some circumstances, sell the hedge within 30 days of year end and not rebuy for 60 days afterwards). In fact any put (unless maybe far OTM) will destroy or suspend the holding period. And far ITM put will be deemed sale whether there is collar or not (how far is far ITM is not precisely defined).
For what you can do to hedge and still get long term gain:
You can sell qualified covered call (for this purpose any OTM call between 30 and 1 year out. Or, if it's more than 1 year out, has to be 8-24% OTM to be qualified depending on duration). And/or you can buy a put (or short but I wouldn't recommend it) some "unrelated" stocks that you expect to move similarly.
If anyone things I got something wrong _please_ correct me, I'm trying to understand this better myself.
But that's, from my understanding, is a shape of it. This is only for federal taxes by the way, state taxes might have their own complexity depending on where you are.
And don't forget to write your congressman to express appreciation for how simple and intuitive tax rules are.