Stock Options Tax Information

Options capital gains from trading

Calculating capital gains from options trading adds additional complexity when filing your taxes.

A stock option is a securities contract that conveys to its owner the right, but not the obligation, to buy or sell a particular stock at a specified price on or before a given date. This right is granted by the seller of the option in return for the amount paid (premium) by the buyer.

Any gains or losses resulting from trading equity options are treated as capital gains or losses and are reported on IRS Schedule D.

Option Sales

IRS Publication 550 page 57 features a table of what happens when a PUT or CALL option is sold by the holder. The table is summarized below:

When a Put:	If you are the holder:	If you are the writer:
Is sold by the holder	Report the difference between the cost of the put and the amount you receive for it as a capital gain or loss.*	This does not affect you. (But if you buy back the put, report the difference between the amount you pay and the amount you received for the put as a short-term capital gain or loss.)

When a Call:	If you are the holder:	If you are the writer:
Is sold by the holder	Report the difference between the cost of the call and the amount you receive for it as a capital gain or loss.*	This does not affect you. (But if you buy back the call, report the difference between the amount you pay and the amount you received for the call as a short-term capital gain or loss.)

* Please note that if you are the holder of a put or call option (you bought the option) and you sell it before it expires, your gain or loss is reported as a short-term or long-term capital gain depending on how long you held the option.

• If you held the option for 365 days or less before you sold it, it is a short-term capital gain.
• If you held the option for more than 365 days before you sold it, it is a long-term capital gain.

However, if you are the writer of a put or call option (you sold the option) and you buy it back before it expires, your gain or loss is reported is considered short-term no matter how long you held the option.

Option Expirations

All stock options have an expiration date. If an option expires, then this closes the option trade and a gain or loss is calculated by subtracting the price paid (purchase price) for the option from the sales price of the option. It doesn't matter if you bought the option first or sold it first.

If you bought an option and it expires worthless, you naturally have a loss. Likewise, if you sold an option and it expires worthless, you naturally have a gain. If your equity option expires, you generated a capital gain or loss, usually short-term because you held the option for one year or less. But if it was held longer, you have a long-term capital loss.

IRS Publication 550 page 57 features a table of what happens when a PUT or CALL option expires. The table is summarized below:

When a Put:	If you are the holder:	If you are the writer:
Expires	Report the cost of the put as a capital loss on the date it expires. *	Report the amount you received for the put as a short-term capital gain.

When a Call:	If you are the holder:	If you are the writer:
Expires	Report the cost of the put as a capital loss on the date it expires. *	Report the amount you received for the call as a short-term capital gain

* Please note that if you are the holder of a put or call option (you bought the option) and it expires, your gain or loss is reported as a short-term or long-term capital gain depending on how long you held the option.

• If you held the option for 365 days or less before it expired, it is a short-term capital gain.
• If you held the option for more than 365 days before it expired, it is a long-term capital gain.

However, if you are the writer of a put or call option (you sold the option) and it expires, your gain or loss is reported is considered short-term no matter how long you held the option.

Sounds simple enough, but it gets a much more complicated if your option gets exercised.

Option Exercises and Stock Assignments

Since all option contracts give the buyer the right to buy or sell a given stock at a set price (the strike price), when an option is exercised someone exercised their rights and you may be forced to buy the stock (the stock is put to you) at the PUT option strike price, or you may be forced to sell the stock (the stock is called away from you) at the CALL option strike price.

There are special IRS rules for options that get exercised, whether you as the holder of the option (you bought the option) exercised your rights, or someone else as the holder of the option (you sold the option) exercised their rights.

IRS Publication 550 page 57 features a table of what happens when a PUT or CALL option is exercised. The table is summarized below:

When a Put:	If you are the holder:	If you are the writer:
Is exercised	Reduce your amount realized from sale of the underlying stock by the cost of the put.	Reduce your basis in the stock you buy by the amount you received for the put.

When a Call:	If you are the holder:	If you are the writer:
Is exercised	Add the cost of the call to your basis in the stock purchased.	Increase your amount realized on sale of the stock by the amount you received for the call.

Your option position therefore does NOT get reported on schedule d, but it's proceeds gets included in the stock position from the assignment.

When importing option exercise transactions from brokerages, there is no automated method to adjust the cost basis of the stock being assigned. Brokers do not provide enough detail to identify which stock transactions should be adjusted and which option transactions should be deleted.

Broker 1099 and Options

Remember that broker 1099 we referred to earlier? Don’t expect to see your gross proceeds for any options trades accounted for here! Most broker 1099s only account for stock trades, which leaves an active trader “high and dry” when it comes time to complete the IRS Schedule D or Form 6781. And don’t forget: just because an option transaction isn’t listed on your 1099 doesn’t mean you don’t have to report it to the IRS and pay any tax liability.