Tax Facts

7579 / How is the writer of an unlisted put or unlisted call taxed if the writer repurchases the option from the holder?

If the writer of an unlisted option repurchases the option from its holder, he or she will realize short-term capital gain or loss to the extent of the difference between the premium paid to repurchase the option and the premium originally received by the writer.1 See Q 702 for the treatment of capital gains and losses.

Certain combinations of options, or options held contemporaneously with offsetting positions that have the effect of reducing both the taxpayer’s risk of loss and his or her opportunity for gain, may trigger constructive sales treatment under IRC Section 1259. The operation of these rules is explained at Q 7617 to Q 7621, and the effect of closing out or reopening certain transactions that are subject to constructive sale treatment is explained at Q 7618.

The contemporaneous holding of a call option and granting of a put option with respect to an equity interest in a pass-through entity may constitute a “constructive ownership transaction” under IRC Section 1260 (see Q 7622 and Q 7623).

1.   IRC § 1234(b); Rev. Rul. 78-181, 1978-1 CB 261.

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