7578 / How is the writer of a put taxed when the option is exercised by the owner?

The writer of a put (listed or unlisted) realizes no taxable gain or loss on the purchase of the underlying stock pursuant to exercise of the put. However, for purposes of determining the writer’s gain or loss on a subsequent sale of the underlying stock, the writer’s tax basis in that stock is reduced by the amount of the option “premium” received in the original sale of the put. Furthermore, the holding period of the underlying stock begins on the date of its purchase, not on the date the put was written.¹

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1. Rev. Rul. 78-182, 1978-1 CB 265.