Donating Protected Puts - What is deductable?

[fgopc1]

I have:

• Stock that has been held well over a year with large cap gains.
• Deeply in the money put options on stock with very large cap gains. (Puts purchased after stock held a year when stock was a lot higher)

If I understand correctly:

• If I sell the stock and put individually, stock is LTCG (long term cap gain) and put is STCG (short term cap gain)
• If I exercise the stock with the put, effectively the stock is LTCG and the put is LTCG. (because you increase basis of stock by put's purchase price)

As these are the highest appreciated securities I have, I've been considering donating them; my Donor Advised Fund has validated they can accept the put and exercise the stock with it.

What I'm unclear is what I'm allowed to do for the tax deduction, since securities held for long term can be deducted (schedule A) at fair market value, but short term can only be deducted at their basis.

If I donate the "protected put" (stock + put) to charity and they exercise stock with the put, can I deduct the put strike? Or only stock FMV + put basis?

 

[MoreLeverage]

If I sell the stock and put individually, stock is LTCG (long term cap gain) and put is STCG (short term cap gain)

Selling the put is a long or short term capital gain based on its holding period. Only for short option positions are the gains short term regardless of holding period. See Pub 550.

https://www.irs.gov/publications/p550#en_US_2017_publink100010628
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.

Or are you saying your profitable put has a holding period of under a year? Maybe then, assuming the maturity of the put doesn’t get you to a year, you could be in the situation you’re thinking about where using the put is better than donating both pieces. I’m not up on the donation rules to be sure about that.

 

[fgopc1]

Or are you saying your profitable put has a holding period of under a year?

Whoops, missed that detail. Ya, put is not a LEAP, so will have a short term holding period at expiry. Clearly in a situation where exercise is superior to selling separately (time value is almost nil at this point).. but the donation rules appear unclear.