Cost Basis for Options Trades: How to Calculate It Correctly
Summary
Cost basis for options depends on whether you opened with a buy or sell, whether the option was closed, expired, exercised, or assigned, and any adjustments from wash sales or corporate actions. Getting this wrong means overpaying or underpaying taxes. Your broker calculates basis for most scenarios, but complex situations—multi-leg trades, assignments, and wash sale adjustments—often require manual verification.
Key Takeaways
For long options, cost basis equals the premium paid plus commissions. For short options, the proceeds equal the premium received minus commissions. Assignment and exercise create hybrid stock/option transactions where the option premium adjusts the stock's cost basis. Wash sale disallowed losses increase the cost basis of the replacement position.
---
I've reviewed hundreds of broker 1099-B statements and found cost basis errors in roughly one out of every five accounts with active options trading. The errors are rarely in your favor.
Basic Cost Basis Formulas
Buying an Option (Long Position)
Cost basis = Premium paid + Commissions
You buy 5 NVDA $120 calls at $4.00 each. Commission: $3.25.
Selling an Option (Short Position)
Proceeds = Premium received - Commissions
You sell 3 AAPL $190 puts at $2.50 each. Commission: $1.95.
Your cost basis for the short option is the price you pay to close it (or $0 if it expires).
Exercise and Assignment Scenarios
Long Call Exercised
When you exercise a call, the option premium becomes part of your stock's cost basis.
Stock cost basis = Strike price + Premium paid + Commissions (on both the option and stock purchase)
You bought 2 MSFT $400 calls for $8.00. You exercise them.
The option trade disappears from your records. There's no separate gain or loss on the option.
Short Put Assigned
When your short put is assigned, the premium reduces your stock cost basis.
Stock cost basis = Strike price - Premium received + Commissions
You sold 1 AMZN $180 put for $5.00. You're assigned at $180.
Short Call Assigned (Covered Call)
The call premium increases your stock sale proceeds.
Stock sale proceeds = Strike price + Premium received - Commissions
You own 100 shares of GOOGL at $160 cost basis. You sold a $175 call for $3.50. Assigned at $175.
Long Put Exercised
When you exercise a put to sell stock, the premium reduces your sale proceeds.
Stock sale proceeds = Strike price - Premium paid - Commissions
You own 100 shares of META at $500. You bought a $480 put for $12.00 and exercise it.
Multi-Leg Strategy Cost Basis
Credit Spreads
Each leg has its own cost basis. Selling a $50 put for $3.00 and buying a $45 put for $1.00 creates two separate transactions:
Your broker may report these individually or as a combined spread. Either way, verify the per-leg basis is correct.
Wash Sale Adjustments to Cost Basis
When a wash sale disallows a loss, that loss gets added to the replacement position's cost basis.
You sell an AAPL $180 call at a $600 loss. Within 30 days, you buy an AAPL $185 call for $800.
This higher basis means you'll recognize a larger loss (or smaller gain) when you eventually close the replacement position. The tax benefit is deferred, not eliminated.
Tools for Tracking Cost Basis
Manually tracking cost basis across hundreds of trades is error-prone. Use OptionsPilot to log each trade with entry price, commissions, and outcome. Export your trade history at tax time and compare against your 1099-B line by line. Tax-specific software like TradeLog or GainsKeeper can automate wash sale adjustments and assignment cost basis calculations.