If an Option Expires Worthless, Is It a Capital Loss?

When an option expires worthless, it is treated as a capital loss for the person who bought it and a short-term capital gain for the person who sold (wrote) it. The buyer’s loss equals the premium paid plus commissions; the seller’s gain equals the premium received. Whether the buyer’s loss is short-term or long-term depends on how long the option was held, but the seller’s gain is always short-term. Different rules apply to index options and other Section 1256 contracts.

If You Bought the Option

The tax code treats an expired option as though you sold it for zero on the day it expired. Under 26 U.S.C. § 1234(a), the character of the loss follows the character of the underlying property. Because stocks and ETFs are capital assets in the hands of most individual investors, an expired equity option produces a capital loss equal to the premium you paid plus any transaction costs.¹

Holding period decides the flavor. Held one year or less: short-term. Held more than one year: long-term.² Most listed equity options carry expirations within a few months of purchase, so the majority of these losses end up short-term. That distinction matters because short-term losses first offset short-term gains, which would otherwise be taxed at ordinary income rates, while long-term losses first offset long-term gains, which are taxed at the lower capital gains rate.

IRS Publication 550 gives a clean example: ten call options bought for $4,000 in April that expire in December produce a $4,000 short-term capital loss for the buyer.³

If You Sold the Option

The result flips when you wrote the option. The premium you collected becomes a capital gain when the option lapses. And here the code draws a hard line: under Section 1234(b), gain or loss on the lapse of an option for the grantor is always treated as gain or loss from a capital asset held not more than one year. It does not matter whether the option lived for two weeks or fourteen months. The gain is short-term.¹

Short-term capital gains are taxed at your ordinary income rate, which can reach 37% at the federal level. The taxable amount is the full premium received, less any commissions you paid to open the position. In Publication 550’s parallel example, the writer who collected $4,000 for those ten calls recognizes a $4,000 short-term capital gain when they expire.³

Index Options and Other Section 1256 Contracts

Not every option follows the rules above. Broad-based index options (such as options on the S&P 500), regulated futures contracts, and options on futures fall into a separate category called Section 1256 contracts. They get a blended treatment: 60% of any gain or loss is long-term and 40% is short-term, no matter how long you held the position.⁴

The 60/40 split applies to both buyers and sellers, and it applies whether the contract expires worthless, is closed out, or is still open at year-end. Section 1256 contracts are marked to market on December 31, so open positions generate recognized gain or loss as though sold at fair market value on the last business day of the year.⁵

The line between equity and nonequity options is the key. An equity option is one on stock or on a narrow-based stock index; options on individual names like Apple or Tesla are equity options and follow Section 1234. A nonequity option is any listed option that is not an equity option, which sweeps in broad-based index options like SPX and NDX. Those are Section 1256 contracts.⁴

A worked case: an SPX put bought for $2,000 that expires worthless produces a $2,000 loss, split into $1,200 long-term (60%) and $800 short-term (40%). That blended rate is part of why active traders gravitate toward index options.

The Wash Sale Trap

The wash sale rule can quietly disallow a loss you thought was locked in. Under Section 1091, if you sell a security at a loss and acquire a substantially identical security within 30 days before or after that sale, the loss is disallowed for the current tax year and added to the basis of the replacement position instead.⁶

The statute defines “stock or securities” to include contracts or options to acquire or sell stock or securities, and it states that cash settlement does not create an escape hatch. So if a call on XYZ stock expires worthless on March 15 and you buy another XYZ call with a similar strike and expiration within 30 days, the loss on the expired option can be disallowed as a wash sale.⁶

One boundary worth knowing: wash sale rules do not apply to Section 1256 contracts, because those are already marked to market at year-end.⁵ If you frequently let one equity option expire and open a near-identical position days later, that is exactly the pattern the rule targets.

How to Report It

The form depends on what kind of option it was.

Equity Options

Report each expired equity option on Form 8949, Sales and Other Dispositions of Capital Assets. Enter the expiration date as the date sold. For a buyer, proceeds are zero and cost basis is the premium paid plus commissions. For a seller, treat the premium received as proceeds against a zero cost. Your brokerage will typically issue a Form 1099-B, but reporting accurately is on you.⁷ Totals from Form 8949 carry to Schedule D (Form 1040), which nets short-term and long-term figures for your 1040.⁸

Section 1256 Contracts

Broad-based index options, futures options, and regulated futures contracts go on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles. The form performs the 60/40 split for you: line 8 pulls out 40% as short-term and line 9 pulls out 60% as long-term, and both figures flow to Schedule D.⁵ Putting SPX trades on Form 8949 instead of Form 6781 forfeits the favorable 60/40 treatment. Brokerage 1099-Bs usually flag Section 1256 contracts separately, but not always, so check.

Using the Loss: $3,000 Cap and Carryforward

Capital losses first offset capital gains dollar for dollar. If total capital losses exceed total capital gains for the year, you can deduct up to $3,000 of the excess against ordinary income such as wages ($1,500 if married filing separately).²

Anything beyond that $3,000 carries forward indefinitely. The carryforward keeps its character: short-term stays short-term, long-term stays long-term. It continues to offset gains and up to $3,000 of ordinary income each year until it is used up.²

A rough picture: a $15,000 net capital loss from options trading, with no offsetting gains, produces a $3,000 deduction this year and a $12,000 carryforward. At $3,000 per year, absorbing the rest takes four more years. The IRS does not track the carryforward balance for you, so keep your own records.

1
Office of the Law Revision Counsel. 26 U.S. Code 1234 – Options to Buy or Sell
2
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
3
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
4
Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market
5
Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles
6
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
7
Internal Revenue Service. Instructions for Form 8949 Sales and Other Dispositions of Capital Assets
8
Internal Revenue Service. Schedule D (Form 1040)