7571 / How is an owner of a put taxed if the put expires before exercising it?

Future regulations will provide that if a taxpayer enters into certain option transactions (e.g., the purchase of a put) and the underlying property becomes substantially worthless, the taxpayer will recognize gain in the same manner as if the contract were closed when the property became substantially worthless.³

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 opportunity for gain, may trigger constructive sales treatment under IRC Section 1259 (see Q 7617 to Q 7621).

If a put option was part of a tax straddle in the hands of the investor, the tax straddle rules may result in deferring recognition of the loss realized on the expiration of the put and, in addition, may 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.

For the effect that the acquisition and subsequent lapse of a put have on the underlying stock, see Q 7568. The tax effects of allowing “married” puts to lapse are discussed in Q 7573.