Can I Deduct Expired Option Trades?
A stock option is a contract between a buyer and a seller giving the buyer the right to buy or sell stock from the contract seller at a specific price, on the day the contract expires. Contracts are bought and sold for a price called a premium. There can be two separate tax consequences when a contract expires unexercised. If you are a seller, expired contracts give you a capital gain, while if you are a buyer, expired contracts you own constitute a capital loss, which can be deducted.
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Expiring Worthless
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Options expire worthless to the buyer on their expiration day if they cannot be exercised for a profit. For example, if you own a contract giving you the right to buy IBM stock for $100 from the option seller and IBM is trading at $90 on the day the contract expires, your contract has no value to you. In this case, you can buy IBM for $10 cheaper on the market than you could if you exercised your contract. Thus, you would let the contract expire unexercised, losing the premium you paid for the contract.
Option Writers and Capital Gains
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When you sell an options contract, you collect a premium from the buyer. If the buyer chooses not to exercise the contract because it has expired worthless, you keep 100 percent of the premium you collected as your profit. In this case, the premium you collect is a taxable capital gain.
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Option Buyers and Capital Losses
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If you bought an option contract that expired worthless, the premium you paid for the contract represents a capital loss to you. If the contract were less than one year old before it expired, you must record it as a short-term capital loss when you file your tax returns. If the contract was more than a year old when it expired, you must report it as a long-term capital loss.
Net Capital Loss Deduction
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To take a deduction on your expired options you must have incurred a net capital loss. Net capital loss is your total loss after all capital gains you earned during the year have been been subtracted. Short-term capital losses can only be used to offset short-term capital gains and long term losses can only be used to offset long-term gains. You can deduct up to $3,000 per year in combined net long and short term losses. If you have a net loss larger than this amount, you can save your excess losses and carry them over to the next year.
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References
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