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:

When a Put: If you are the holder: If you are the writer:
Is sold by the holder Report the difference between the cost of the put and the amount you receive for it as a capital gain or loss. This does not affect you. (But if you buy back the put, report the difference between the amount you pay and the amount you received for the put as a short-term capital gain or loss.)
When a Call: If you are the holder: If you are the writer:
Is sold by the holder Report the difference between the cost of the call and the amount you receive for it as a capital gain or loss. This does not affect you. (But if you buy back the call, report the difference between the amount you pay and the amount you received for the call as a short-term capital gain or loss.)


NOTES:

  • 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

Don't expect to see your gross proceeds for any options trades accounted for on your brokerage provided 1099-B. Most broker 1099s 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.

Special Report:
The 1099-B Problem

1099-B Problem Download your
free copy!

30-Day Trial Purchase TradeLog Now!

Connect With Us: