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Series 7 practice questionmediumOptions — Tax Treatment

When a listed equity option expires unexercised, the premium paid by the buyer is treated for tax purposes as:

  1. AAn ordinary loss
  2. BA carryforward loss with no expiration
  3. CA deductible expense
  4. DA capital loss on the expiration date✓ Correct answer
Explanation

Why D — A capital loss on the expiration date

When a listed option expires worthless, the buyer recognizes a capital loss equal to the premium paid. The loss is reported on the expiration date. Whether it is short-term or long-term depends on how long the option was held. Most listed options result in short-term capital losses since they are held for less than one year.

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