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Dec '25 • General
Are the use of Puts obvious to you?
I was advised today, if you are concerned that a high flying stock or ETF might go down but are interested in the potential future upside, rather than sell it now and have to pay capital gains and buy it back later you can buy "puts" and not have to pay the tax on gains, unless it does go down, which now might be in the next calendar year.
Do other people here do this? I was thinking it might be useful as we are going into a new year, and if I can delay my selling to next year I can spread out gains so I don't have to cough up the cash for those gains on April 15, 2026. Am I looking at this wrong?
For more details AI stated the following:
Key Tax Implications of Buying Puts as a Hedge
- No immediate capital gains tax on the stock: The primary benefit is that you don't sell your stock, so you don't trigger an immediate capital gains tax event. The unrealized gains remain unrealized until you eventually sell the stock.
- "Straddle" rules and loss deferral: The IRS generally considers holding a stock and a put option on that same stock with a similar strike price a "straddle," which means:Losses on the put may be deferred: If you close the put at a loss (e.g., if the stock goes up and the put expires worthless), that loss cannot be deducted until you sell the underlying stock.Gains on the put are taxed: If the stock falls and you sell the put for a gain, that gain is taxable in the year you realize it.
- Holding period may be affected: If you buy a put on stock you've held for less than a year, the stock's holding period immediately stops accumulating for tax purposes. It will only restart once the put option position is closed. This could prevent your gains from qualifying for the lower long-term capital gains tax rate, making them short-term gains (taxed at your potentially higher ordinary income rate) even if you hold the stock for over a year in total.
- Dividends may be affected: Buying a put on a dividend-paying stock may cause the dividends to be taxed at the higher ordinary income rate (non-qualified dividends) instead of the lower qualified dividend tax rate, as the holding period for the stock is considered "hedged".
- Cost of the put: The premium you pay for the put option becomes part of your cost basis in the overall position, but it is not a deductible expense until the position is closed or expires.
Summary
The advice to buy puts instead of selling stock to defer a gain is a valid strategy for some, but it comes with complexities. It primarily defers the tax on your stock, but introduces specific rules about when you can claim losses on the put and how your stock's holding period is treated.
It is highly recommended to consult with a qualified tax professional or financial advisor to understand fully how these complex tax rules, including the straddle and holding period rules, apply to your specific situation. You can find more information on the IRS website or through financial education resources from firms like Fidelity or Investopedia.
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Are the use of Puts obvious to you?
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