Derivatives - Tax Treatment of Options

How are gains made in the options market treated come tax time? The tax consequences of an options transaction depend in part on the tax status of the investor and may differ depending on the type of underlying commodity involved.

Tax rules are not the same for equity, index, currency and debt options. Here are some other taxation factors to consider:
  • Whether an option has been exercised, has expired or is still open
  • Whether the option is covered or uncovered
  • Whether the option represents a short or long position
Typically, a long option that has been exercised results in a capital gain or loss. One that has expired without exercise results in a capital loss of the premium.

A short option that has been exercised also results in a capital gain or loss. One that has expired without exercise results in a capital gain of the premium. Introduction


Related Articles
  1. Professionals

    Possible Outcomes For An Option

    Exercised If the option is exercised, the buyer has elected to exercise their rights to buy or sell the stock depending on the type of option involved. Exercising an option obligates the seller ...
  2. Professionals

    Option Styles

    Series 7 - Section 8: Option Styles
  3. Professionals

    Calls And Puts

    Calls And Puts
  4. Professionals

    Exercising An Index Option

    It is usually not wise to exercise an index option prior to its expiration because the investor would lose any amount of time value contained in the options premium. Additionally, if the investor ...
  5. Options & Futures

    4 Reasons To Hold Onto An Option

    There are times when an investor shouldn't exercise an option. Find out when to hold and when to fold.
  6. Professionals

    POSSIBLE OUTCOMES FOR AN OPTION

    Possible Outcomes For an Option Exercised If the option is exercised, the buyer has elected to exercise their rights to buy or sell the stock depending on the type of option involved. Exercising ...
  7. Professionals

    Managing An Option Position

    Both the buyer and seller, in an option trade, establish the position with an opening transaction. The buyer has an opening purchase and the seller has an opening sale. To exit the option position, ...
  8. Professionals

    F. Characteristics of All Options

    All option contracts are issued and their performance is guaranteed by the Options Clearing Corporation (OCC). Standardized options trade on the exchanges, such as the Chicago Board Options Exchange ...
  9. Options & Futures

    Options Pricing: A Review Of Basic Terms

    The following is intended as a review of basic option terminology, which can be used as a reference as needed: American Options - An option that can be at any point during the life of the contract. ...
  10. Options & Futures

    How Are Futures & Options Taxed?

    We present a basic introduction to the US tax processes of futures and options.
RELATED TERMS
  1. Call On A Call

    A type of compound option in which the investor has the right ...
  2. Early Exercise

    The exercise of an option prior to its expiration date. Early ...
  3. American Option

    An option that can be exercised anytime during its life. American ...
  4. Call Over

    When the buyer of a call option exercises the option. In options ...
  5. Exercise Price

    The price at which the underlying security can be purchased (call ...
  6. Exercise Backdating

    A practice where option holders fraudulently claim to have exercised ...
RELATED FAQS
  1. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
  2. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  3. After exercising a put option, can I still hold my option contract in order to sell ...

    Once a put option contract has been exercised, that contract does not exist anymore. A put option grants you the right to ... Read Answer >>
  4. What are the SEC regulations on exercising stock options?

    Learn how the SEC and IRS regulate employee stock options, including the exercise of options and the sale of options, and ... Read Answer >>
  5. Can an option be exercised on the expiration date?

    The use of options has increased dramatically over the years as a way to profit from or hedge against the volatile movements ... Read Answer >>
  6. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center