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Series 7 practice questionhardOptions — Tax Treatment of Writer

When an option expires unexercised, the writer recognizes the premium as:

  1. AOrdinary income on the expiration date
  2. BA short-term capital gain on the expiration date✓ Correct answer
  3. CA long-term capital gain on the date the option was written
  4. DA return of capital with no tax consequence
Explanation

Why B — A short-term capital gain on the expiration date

When an option expires worthless, the writer recognizes the premium received as a short-term capital gain on the expiration date, regardless of how long the option was outstanding. The holding period for the writer begins when the option is written and ends when it expires. The gain is always short-term for the writer of an expired option.

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