Do You Pay Taxes on Expired Options? What the IRS Expects

Summary

Yes, expired options create taxable events. If you bought an option and it expires worthless, you have a capital loss equal to the premium paid. If you sold an option and it expires worthless, you have a capital gain equal to the premium received. The expiration date is the date of the taxable event. These are almost always short-term transactions.

Key Takeaways

Expired options are reported on your tax return the same year they expire, not the year you opened them. A call you bought in November 2025 that expires in January 2026 is a 2026 tax event. Sellers benefit from expirations because the full premium is a realized gain with no closing cost. Buyers get a full loss deduction, subject to capital loss limitations.

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Every Friday, millions of options expire. Most traders know this affects their P&L, but many don't realize the specific tax treatment differs based on whether you were the buyer or seller.

If You Bought the Option (Long Position)

When you buy a call or put and it expires worthless, your loss equals the total premium paid including commissions.

Example: You bought 3 GOOGL $180 calls for $4.50 each ($1,350 total). The stock stayed below $180 and the options expired worthless.

  • Realized loss: $1,350
  • Type: Short-term capital loss (assuming held under 12 months)
  • Tax event date: Expiration date
  • Reported on: Schedule D via Form 8949

    • This loss offsets other capital gains dollar-for-dollar. If you have no capital gains, you can deduct up to $3,000 against ordinary income, with the rest carried forward.

    If You Sold the Option (Short Position)

    When you sell a call or put and it expires worthless, the entire premium received becomes a realized short-term capital gain.

    Example: You sold 2 AAPL $200 puts for $3.00 each ($600 total). AAPL stayed above $200 and the puts expired worthless.

  • Realized gain: $600
  • Type: Short-term capital gain
  • Tax event date: Expiration date
  • Reported on: Schedule D via Form 8949

    • The gain is short-term regardless of when you opened the position. Even if you sold the puts 14 months ago, the IRS treats the expiration as the closing event and the holding period is measured from open to expiration.

    Covered Calls That Expire Worthless

    Covered calls that expire worthless have a straightforward treatment: the premium received is a short-term capital gain. The underlying shares are unaffected—their cost basis doesn't change and their holding period continues.

    Example: You own 200 shares of MSFT bought at $380. You sell 2 covered calls at the $420 strike for $5.00 each ($1,000 total). MSFT closes at $415 and the calls expire.

  • Covered call gain: $1,000 (short-term)
  • MSFT shares: Still held at $380 cost basis, holding period uninterrupted

    • If you're using OptionsPilot to find covered call strikes, every expiration that keeps your shares results in a clean short-term gain on the premium with no impact on your stock position.

    Timing Considerations

    The tax year is determined by the expiration date, not the trade date. This creates planning opportunities:

  • Year-end losses: Buy cheap puts in December. If they expire in December, you get the loss in the current year.
  • Defer gains: Sell options in December that expire in January. The premium income shifts to the next tax year.
  • Loss harvesting: If you hold a losing long option near expiration, consider whether it's better to sell it (realizing the loss on the sell date) or let it expire (loss realized on expiration date). Usually, selling slightly before expiration produces the same loss but gives you control over the exact date.

    • What About Partially Worthless Options

    If an option doesn't expire but loses most of its value, you don't have a tax event until you sell or it expires. You can't claim a loss on an option that still has time value, even if it's deep out of the money. The IRS requires a "closed transaction"—either a sale, expiration, or exercise.

    Reporting Expired Options

    Your broker reports expired options on Form 1099-B. The proceeds are listed as $0 for long options that expire worthless. For short options that expire worthless, the cost basis is $0 and the proceeds equal the premium received.

    Double-check your 1099-B against your own records. Brokers occasionally misreport expiration dates or fail to match opening and closing transactions correctly, especially for complex multi-leg strategies.