| What are the tax consequences of Put and Call options?
Some of the most commonly misunderstood capital transactions are the tax treatment of put and call options. Lets start with understanding the definitions of each type of option and then consider the tax consequences of each type of transaction.
1. What are Put options?
These are option contracts to acquire the right to sell a stated number of shares of stock or securities at a specified price, which is referred to as the strike
price. The purchaser pays a premium to an option writer to acquire this right for a specified period of time.
The tax consequences of put options are as follows:
1. No gain or loss is recognized from initiating the sale or a purchase of a put option.
2. The holder of the put option recognizes either a gain or loss when the option is allowed to expire unexercised or the option is sold or assigned for value.
2. What are Call Options?
These are option contracts under which the purchaser pays a premium to acquire the right to buy at any time before a specific date, a stated number of shares of stock or securities at a specific price.
The tax consequences of call options are as follows:
1. If the option is allowed to expire without exercise, the taxpayer will have a capital loss equal to the cost of the contract.
2. If the option is exercised, the taxpayer’s basis in the securities is the strike price plus the cost of the call option. The holding period for the securities begins on the date the stock is acquired.
3. The Holder of the Call option will recognize a gain or loss if the option is sold or exchanged.
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