As an investor in options, your tax reporting is the same as when you invest in stocks. The gain or loss for an option on a capital asset is reported just like a gain or loss from owning the asset itself. The difference is that options can expire but stocks do not. This may require reporting an expiration date on Schedule D as a sale date or purchase date. Conventional options start trading less than nine months prior to expiration. Therefore, the capital gain or loss from most options is short term and reported on Schedule D's Part I. The gain or loss is taxable in the year that the options position is closed by sale or expiration. Further complicating matters is the short sale of options. This is the sale of an option contract that is not owned, followed by a repurchase or expiration of the options.
Compose a short description of the option in column (a) of the first line on Part I of the Internal Revenue Service's Schedule D (Capital Gains and Losses).
Record the date of option purchase in column (b). For a normal “long” position, the purchase date precedes the sale date. For a short sale, the purchase date is after the sale date. If your position was a short sale and the option expired, enter the expiration date of the option.
Enter the date of option sale in column (c). If you had a long position and the option expired, enter the expiration date of the option.
Place the sale proceeds in column (d). If you executed a short sale, this is the amount you received when establishing your option position. The sale proceeds are zero for a long position that expired.
State the cost of the option in column (e). If you had a long position, this is the amount you paid for the option. The cost is zero for a short position that expired.
Subtract column (e) from column (d) and record the result in column (f). This is the gain on the option or the loss if the figure is a negative number.
Don’t use Schedule D to report a gain or loss on an option that is a section 1256 contract. This is any regulated futures contract, foreign currency contract, non-equity option, dealer equity option or dealer securities futures contract. Non-equity options include debt options, commodity futures options, currency options and broad-based stock index options. The terms “dealer equity option” and “dealer securities futures contract” are relevant to securities dealers only.
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