Tax Rules for Calculating Capital Gains from Trading Options
Calculating capital gains from trading options 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 and Form 8949.
Special rules apply when selling options:
IRS Publication 550 page 57 features a table of what happens when a PUT or CALL option is sold by the holder:
- 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.
Brokerage 1099-B and Options
Tax Year 2014 and beyond:
Starting in 2014 brokers began to include options on their 1099s. One may think this would be a simple task, yet it has proven to be much more complex than anticipated, and fraught with errors. For one thing the brokers have a very limited set of rules when adjusting for wash sales compared to taxpayers, and there seems to be no clear standard adjustment method from one broker to the next. The net result is cost basis that is far from reality. Some brokers are even adjusting the sales amount rather than cost which makes reconciling the 1099 gross sales almost impossible. See our Broker 1099-B Reporting Problems page for more details.
Tax Years P\prior to 2014:
Don't expect to see your gross proceeds for any options trades accounted for on your brokerage provided 1099-B. Most broker 1099s prior to 2014 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.
What happens when options expire? - Learn more now.
Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Armen Computing Ltd. does not make investment recommendations nor provide financial, tax or legal advice. You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation.