Tax Facts

7576 / If a put or call expires without exercise, how is the writer taxed?

When a put or call (whether listed or unlisted) expires without exercise (i.e., lapses), the premium that has been carried by the writer in a deferred account since the option was sold (see Q 7574) is recognized as short-term capital gain and included in the writer’s gross income for the tax year in which the option expired.1 See Q 702 for the treatment of capital gains and losses.

Under regulations expected to be issued in the future, if the underlying property on which the option is written becomes worthless, the taxpayer will recognize gain or loss in the same manner as if the contract were closed when the property became substantially worthless.2

1.   IRC § 1234(b)(1); Rev. Rul. 78-182, 1978-1 CB 265.

2.   IRC § 1233(h)(1).

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