7581 / Other than stock options, what kinds of options are classified as “equity” options? How are these options taxed?

For taxable years beginning after 2001, the term “equity option” includes an option on a group of stocks only if that group meets the requirements for a narrow-based security index (as defined in Section 3(a)(55)(A) of the Securities Exchange Act of 1934) (see Q 7560).¹ For taxable years beginning before 2000, options other than stock options could be classified as “equity” options for federal income tax purposes if their value was determined by reference to a group of stocks or stock index, but they were of a type that was ineligible to be traded on a commodity futures exchange. (An example of such an option would have been an option contract on a sub-index based on the price of nine hotel-casino stocks.) An equity option could be either a listed option or an unlisted option (i.e., traded over-the-counter or otherwise).²

These “other” equity options were generally taxed under the same rules that apply to stock options. See Q 7556 to Q 7580 for details. For the application of the straddle rules to such options, see Q 7593 to Q 7614.

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1.   IRC § 1256(g)(6).

2.   IRC § 1256(g)(6), prior to amendment by CRTRA 2000.

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