Option Expirations

All stock options have an expiration date. If an option expires, then this closes the option trade and a gain or loss is calculated by subtracting the price paid (purchase price) for the option from the sales price of the option. It doesn't matter if you bought the option first or sold it first.

If you bought an option and it expires worthless, you naturally have a loss. Likewise, if you sold an option and it expires worthless, you naturally have a gain. If your equity option expires, you generated a capital gain or loss,  usually short-term because you held the option for one year or less. But if it was held longer, you have a long-term capital loss.

IRS Publication 550 page 57 features a table of what happens when a PUT or CALL option expires.

Notes:

• If you are the holder of a put or call option (you bought the option) and 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 it expired, it is a short-term capital gain.
• If you held the option for more than 365 days before it expired, it is a long-term capital gain.
• However, if you are the writer of a put or call option (you sold the option) and it expires, your gain or loss is reported is considered short-term no matter how long you held the option.

Sounds simple enough, but it gets a much more complicated if your option gets exercised.

Next understand the effect of exercised options.