TD Ameritrade Accounts - Reporting Cash Settled Exercise for Section 1256 Contracts

When certain cash settled Section 1256 contracts are exercised, some brokers report in the trade history what appears to be shares of an index being bought and sold on the date of exercise. However, since these contracts are cash settled no such shares exist or are traded. TD Ameritrade is one broker known to use this method of reporting.

Example in TradeLog:

Based on IRS Pub 550 (pages 60 and 61): "Gain or loss is recognized on the exercise of an option on a section 1256 contract." This makes sense because, as is the case of these cash-settled index options, you do not actually receive a security when exercised, only cash. Therefore, if your broker uses this type of reporting it must be adjusted in TradeLog for proper tax accounting.

Instructions for correcting cash settlement reporting:

1. Determine the closing price for the contracts. Divide the gain/loss from settlement by the number of "shares".
   
   From the example above: $1,609.99 / 1,000 = $1.60999
2. Select the closing record for the contract and change the Price field from zero to the amount determined. In this example: $1.60999.
   
   To edit the record, select it and hit F2 on your keyboard (or right click and choose Edit). When finished editing, hit the Enter key twice to exit and save the record.
   
   
   Note: the Amount field for the closing option record should now reflect the gain/loss from the cash settlement. The Profit/Loss field reflects the net profit or loss after the cash settlement is accounted for.
3. Next, delete the open and close records for the "shares".
   
   To delete the records simply select and hit the Delete key on your keyboard (or right click and choose Delete). Confirm and save the records.
   

The adjusted Section 1256 contracts will be reported on TradeLog's Section 1256 Contracts report (used for Form 6781).

If you experience problems making these adjustments in TradeLog, please use the Get Support feature in TradeLog to submit your TradeLog file with your support request. Our support team will respond by email with the support you need.