Tax Facts

7566 / How is the owner of a call taxed if the owner allows it to expire without exercising it?

If allowed to expire without exercise (i.e., lapse), a listed or unlisted call is deemed to have been sold or exchanged on the expiration date.1 Thus, the amount of the option “premium” paid by the owner to acquire the call will be treated as a capital loss, the treatment of which will depend on the holding period of the call (see Q 699). (See Q 702 for the treatment of capital gains and losses.)2


Certain combinations of options, or options held contemporaneously with offsetting positions that have the effect of reducing both the taxpayer’s risk of loss and the opportunity for gain, may trigger constructive sales treatment under IRC Section 1259 (see Q 7617 to Q 7621).

The contemporaneous holding of a call option and granting of a put option with respect to an equity interest in a pass-through entity may constitute a “constructive ownership transaction” under IRC Section 1260 (see Q 7622 and Q 7623).

If a call option was part of a tax straddle in the hands of the investor, the tax straddle rules may result in a deferral of the recognition of the loss realized on the expiration of a call option; it may also have unfavorable effects on the characterization of gains and losses realized on positions making up the straddle. See Q 7593 to Q 7614 for details.





1.   IRC § 1234(a)(2).

2.   Treas. Reg. § 1.1234-1(b); Rev. Rul. 78-182, 1978-1 CB 265.


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