The formation of a trading GmbH is currently very popular among options traders, particularly because of the limited loss offsetting in the private sector. A GmbH not only offers the possibility of fully offsetting losses, but also a wide range of structuring options. In this blog post, Alexander Eichhorn shows a tax trick specifically for trading in Cash Secured Puts in the Trading-GmbH.
What is a Cash Secured Put?
This blog post relates exclusively to taxation in a corporation and is not applicable to private individuals. Before we go into the tax trick for trading cash-secured puts, we need to briefly explain the basic taxation of shares and options in a limited company.
The taxation of a Trading-LLC is generally based on corporation tax and trade tax at company level:
- Corporation tax: 15 % plus solidarity surcharge of 5.5 % -> 15.83 %
- Trade tax: depending on location approx. 15 %
This means that the total tax burden of a GmbH in Germany is approx. 30 %. However, there is an important exception for the sale of shares!
Podcast tip: Trading GmbH - The schedule for founding a company
Gains from the sale of shares (only shares, not ETFs/REITs/CfDs etc.) are tax-privileged in accordance with Section 8b (2) sentence 1:
"When determining income, gains from the sale of a share in a corporation or association of persons whose benefits are part of the recipient's income within the meaning of Section 20 (1) nos. 1, 2, 9 and 10 letter a of the Income Tax Act or in a controlled company within the meaning of Section 14 or Section 17 shall not be recognized."
Gains from the sale of shares are not taken into account when calculating income, but they are not completely tax-free. Of the capital gain, 5 % are considered non-deductible operating expenses and must be taxed.
Example:
- Share bought at a price of € 100
- Share sold at a price of € 200
- Profit of the trade: 100 €
Taxation in the GmbH: 5 % (non-deductible operating expense) of profit (€ 100) = € 5 tax base
Tax burden: € 5 (tax base) * 30 % Tax burden (trade tax and corporation tax) = € 1.50
Accordingly, a tax burden of approx. 1.5 % is due on share proceeds in a GmbH and they are therefore virtually tax-free (regardless of the holding period!). But bewareLosses from the sale of shares are not deductible!
It is important to emphasize once again at this point: This low tax rate applies exclusively to equity gains and not to dividend income or capital gains from REITs or ETFs.
In addition, option gains in a GmbH are regularly taxed with trade tax and corporation tax, which currently amounts to around % depending on the company's registered office. The loss limitation of € 20,000 does not apply to a GmbH.
In order to use the following trick, you need to understand the different tax rates between share gains and option gains within a GmbH in order to make the best use of them.
Cash-secured puts in the trading GmbH
The following tax trick only works in the case of a potential tender of a cash-secured put. If the option is closed in advance at a profit, the option profit is taxed accordingly with trade and corporation tax.
Now to the trick when tendering a cash-secured put. Example:
- Share price at the opening of the Cash Secured Put: € 100
- Cash Secured Put: Strike: 90 €, premium income: 100 €
The share price now falls from € 100 to € 80, and the cash-secured put only has a term of a few hours. A tender of 100 shares is therefore very likely. What can the writer in a trading company do now?
Case 1: The writer does nothing and has the put option tendered. He is allowed to keep the entire € 100 option premium (taxed at approx. 30 %) and is tendered the shares at the strike price of € 90. With this share position, he currently has a book loss of € 1,000 ((purchase price of € 90 - current market price of € 80) * 100 shares). Assume that the share now rises again to € 100 and the writer sells the shares again. He has then made the following profit and must pay the following taxes:
- Option premium as profit: € 100 with a tax burden of approximately € 30
- Share gains of €1,000 taxed at only 1.5 %, which corresponds to a tax burden of €15.
The net gain is therefore approx. € 1,055 (€ 100 option premium + € 1,000 share gain - tax burden of € 45).
Case 2: The writer does not tender the option. Instead, he closes the cash-secured put shortly before expiry and buys 100 shares on the market.
This results in the following:
- Option loss: € 900. Shortly before expiry, the put option will be deep in the money and have almost only its intrinsic value. This is € 1,000 ((strike price € 90 - current market price € 80) * 100 shares). As € 100 in option premiums were originally received, the loss corresponds to € 900. There is no tax charge for a loss and he has a tax loss of € 900.
- Share profit: € 0, as 100 shares were bought directly on the market for € 80.
In this example, too, the share price rises again to €100. The share gain would then amount to € 2,000 (100 shares bought for € 80), with a tax burden of around € 30 (1.5 % tax). If the option loss of €900 is offset, this results in a gain of €1,100 or a net gain of €1,070. If we ignore the slightly higher net gain in case 2, the much greater advantage lies elsewhere: the option loss of € 900 can be offset against other option gains, which can reduce the tax burden by an additional € 270 (€ 900 * 30 % taxes)!
This trick is also possible with a covered call. In this case, it makes more sense to sell the shares on the market and close the call option at a loss instead of waiting for the call option to be exercised.
Further tax tricks, the process of setting up a GmbH, possible risks and everything else about the trading GmbH can be found in our Wealth magazine summarized.
Summary
If an option is deeply in the money and it is very likely that the shares will be tendered or derecognized, it makes more sense to close the option at a loss and, if necessary, buy or sell the shares on the market. But beware: the tax advantage in the GmbH only applies to shares and not to REITsfutures or ETFs! These examples therefore relate exclusively to equity options!
Conclusion - Secured Puts in Trading GmbH
In a trading GmbH, it is not advantageous from a tax perspective to exercise cash-secured puts. In order to generate a tax loss, the options should be bought back before they expire and the shares purchased directly on the market instead. This results in a tax loss that can be offset against other option gains. At the same time, the investor lowers the entry price of the shares and benefits more from share price gains, which are virtually tax-free in a GmbH. If the cash-secured put is only slightly in the money, this effort may not be worthwhile due to the additional order fees. However, the deeper the option is in the money, the more worthwhile this tax approach becomes.
