Non-equity options tax 60% of gains or losses based on long-term capital tax rates. Both long and short options for the purposes of pure option positions receive similar tax treatment. Gains and losses are calculated when positions are closed or when they expire without exercising. In the case of purchase or sale cancellations, all options that expire unused are considered short-term gains.
Below is an example that covers some basic scenarios. As always, it's best to contact your tax professional for advice before arbitrarily classifying your index options trades. Internal Revenue Service rules consider that the expiration of a stock option is equivalent to the sale of the option for zero dollars on the date it expired without exercising it. You now have an obligation to buy (under the put option you wrote) and a countervailing right to put (under the put option you bought).
With a closing transaction, your financial obligation under the option you issued is offset by the purchase of an equivalent option. If you exercise a call option by buying shares from the issuer at the designated price, add the cost of the option to the price paid for the shares. The premium you receive for selling or short selling an option is not taxable until the option expires, is exercised, offset, or marked for marketing. For individual investors who are venturing into publicly traded stock options for the first time, you need to know how these securities are taxed.
The same applies if the underlying stock is bought while holding the put option before the option's expiration date, regardless of how long the put option was held before the stock was purchased. Your loss of options when you don't use stock options is the premium amount plus transaction fees. Losses on options purchased, which were then worthless, or gains on options sold that never had to be bought again, are stated in Annex D. The good news is that, regardless of the type of option granted to you, you generally won't face any tax consequences the moment you receive the option.
When call options are exercised, the premium paid for the option is included in the cost base for the purchase of shares. Finally, here's a tax tip that isn't exclusive to taxes on options trading, but simply a miscalculation that traders should avoid. If stock options aren't in the money on the date they expire, simply let the options expire without exercising them. The maturity of unexercised stock options creates a capital loss equal to the purchase price of the options.
