How are stock options taxed for investors?

The short answer, and what it depends on

Publication 550’s Options section says gain or loss from selling or trading an option to buy or sell property that is a capital asset is a capital gain or loss. An option on ordinary stock qualifies. The question is therefore not whether option profits are taxed but how the result is classified and timed. That depends on two things: whether you are the holder who bought the option or the writer who sold it, and which of three things ended the option, expiration, a closing transaction or exercise. The publication gathers the outcomes in Table 4-3, and the calculator above applies it to your numbers.

This page is about investors who trade puts and calls on stocks. Stock options granted to employees (incentive stock options and nonqualified options) follow different rules, and so do options that are section 1256 contracts, such as nonequity options, which are marked to market under the section 1256 rules. The publication notes that if an option is part of a straddle, the straddle loss-deferral rules may also apply.

If you buy a put or a call (holder)

The cost of the option is not deductible when you pay it. It is a capital expenditure. What happens next decides the tax:

• It expires worthless. The cost is a capital loss, long-term or short-term depending on your holding period, which ends on the expiration date. If you have a loss because you did not exercise, you are considered to have sold the option on the date it expired.
• You sell it before exercise. The difference between the cost and what you receive is a capital gain or loss, short-term or long-term by how long you held the option.
• You exercise a call. Add the option’s cost to your basis in the stock you buy.
• You exercise a put. Reduce your amount realized on the sale of the underlying stock by the cost of the put. The gain or loss on the stock is short- or long-term based on how long you held the stock.

If you write a put or a call (writer)

You do not include the premium in income when you receive it. The publication says to carry it in a deferred account until your obligation expires, the option is exercised, or you close the position. Then:

• It expires. The premium is a short-term capital gain, even if you wrote the option more than a year before.
• You close it by buying it back. The difference between what you pay and what you received is a short-term capital gain or loss.
• A call you wrote is exercised and you sell the stock. Increase your amount realized on the stock sale by the premium.
• A put you wrote is exercised and you buy the stock. Decrease your basis in the stock by the premium. Your holding period for the stock starts on the day you buy it, not the day you wrote the put.

The publication’s worked examples

Ten JJJ call options were issued on April 8, 2025 for $4,000. If they expired in December 2025 without exercise, a holder has a $4,000 short-term capital loss and a writer has a $4,000 short-term capital gain. If instead the options were sold on May 6, 2025 for $6,000, the holder who sold has a $2,000 short-term gain, and a writer who bought them back has a $2,000 short-term loss. Enter those figures in the calculator to reproduce them. If the options were exercised, the buyer adds the $4,000 cost to the basis of the shares bought, and the writer adds the $4,000 received to the proceeds of the shares sold.

Here is an exercise example of our own. You pay $500 for a call on 100 shares with a $50 strike and exercise it. Your basis in the 100 shares is $5,000 for the stock plus $500 for the call, or $5,500. If you instead wrote that call for $500 and it was exercised, and you delivered stock you owned, your amount realized on that stock is $5,000 plus $500, or $5,500. Gain or loss is then measured against your basis in the shares.

A special rule for puts held with stock

Buying a put is generally treated as a short sale, and its exercise, sale or expiration is the closing of that short sale. The practical effect: if you have held the underlying stock for one year or less when you buy the put, any gain on the put is short-term. The same is true if you buy the stock after the put but before it is exercised, sold or expired. Your holding period for the stock begins on the earliest of the date you dispose of the stock, exercise the put, sell the put, or the put expires. A put bought against stock you have held a year or less can therefore change both the character of the gain and the start of the stock’s holding period.

How to report

Report gain or loss from closing or expiration of an option that is not a section 1256 contract on Form 8949. For an expired purchased option, enter the expiration date in the sale-date column and “Expired” as the proceeds description. For a written option that expired, enter the expiration date in the acquired column and “Expired.” If a call you sold was exercised and the premium was not included in the sales price on your Form 1099-B, enter the premium as a positive adjustment with code “E.”

Limits of this page

Capital losses on options offset capital gains, then up to $3,000 of other income per year, and the wash sale rules apply to losses from sales or trades of contracts and options to acquire or sell stock or securities, according to Publication 550; test a replacement purchase with the wash sale rule calculator. For the payoff of a position before you close it, use the options profit calculator, and for how much a realized loss saves you, the tax loss harvesting calculator.

Sources

• IRS Publication 550, Investment Income and Expenses (2025): Options, Puts and Calls, Table 4-3 (Puts and Calls) and Examples of nondealer transactions in chapter 4. Page last reviewed or updated by the IRS April 30, 2026. Read November 2, 2026.

Edition read: Publication 550 (2025), for use in preparing 2025 returns. Dollar limits and thresholds quoted on this page are for 2025 and can change; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it. Marked for human review.