Are profits from options trading subject to a FICA tax?
Are profits from trading options (or stocks) in a non-qualified brokerage account subject to the 10.4% FICA tax?
No, FICA taxes are payroll taxes withheld from employees paychecks and paid by employees and employers for Social Security and Medicare.
There are many different options strategies that are all taxed differently. Whether you are buying or selling puts and/or calls, covered call writing, straddles or any other sophisticated options strategy. For the basic holders of puts and calls:
- If you buy a put or a call, you may not deduct its cost. It is a capital expenditure.
- If you sell the put or the call before you exercise it, the difference between its cost and the amount you receive for it is either a long-term or short-term capital gain or loss, depending on how long you held it.
- If the option expires, its cost is either a long-term or short-term capital loss, depending on your holding period, which ends on the expiration date.
- If you exercise a call, add it's cost to the basis of the stock you bought.
- If you exercise a put, reduce your amount realized on the sale of the underlying stock by the cost of the put when figuring your gain or loss.
- Any gain or loss on the sale of the underlying stock is long term or short term depending on your holding period for the underlying stock.
As always, when making any investment decisions based on the tax consequences of your investment, it is best to consult with your CPA to make certain that all of your personal financial information is taken into account.
Your trading profit/loss in a non-qualified brokerage account may not be subject to the FICA, but you’re on the hook for the annual short-term capital gain/loss tax. Since most options trading are short-term, and if you are already in a high-income tax status, you will be unpleasantly surprised that your “profit” in the option trading may not be much profit after all after the tax. Thus, if you enjoy the thrill of the option trading, I would suggest to use a qualified account to do to so. Best!
This is a good question.
The short answer to your question is, no, FICA taxes are not withheld from investment income.
Aside from FICA, an individual has the potential to pay Net Investment Income Tax (NIIT) of 3.8% on income from options trading (as well as any other investments income reported on a 1099-B). Although this is not “FICA”, it is potentially an additional tax that may confuse some people. Most people that do trading on the side will not be required to pay NIIT because the thresholds are so high. An individual will need to pay the tax if they have Net Investment Income over $200,000 or $250,000 if they are married filing jointly. An additional Medicare tax of 0.9% can apply to individuals with wages, compensation, and other employment income over a certain threshold, but is not related to NIIT. Please note that additional Medicare tax does not account for investment income.
I hope you found this helpful.
Good question! The answer is mostly no, but not always. I swear there is never a black and white answer to all these questions. So, you never pay social security tax on your investment gains, but you may be subject to a special Medicare tax of 3.8%. You may be subject to the 3.8% Medicare tax on your investment gains if your MAGI (modified adjusted gross income) is over $200K (single) or $250K (couple) or $125K (spouses filing separately).
Hope this helps!
Tom Cymer CFP
President Opulen Financial Group