Chapter 41: Taxes 913 
500 calls for $1,500 and sold them 6 weeks later for $3,500. Second, he bought an 
OEX January 160 call for 3.25 seven months ago and still holds it. It currently is trad­
ing at 11.50. Finally, he sold 5 SPX February 250 puts for 1.50 three days ago. They 
are currently trading at 2. The net gain from these transactions should be computed 
without regard to holding period. 
Nonequity Original Current Gain/ 
Contract Price Price Cost Proceeds Loss 
S&P calls $1,500 $3,500 +$2,000 realized 
OEX January 160 3.25 11.50 $ 325 $1,150 + 825 unrealized 
SPX February 250 1.50 2.00 $1,000 $ 750 250 unrealized 
Total caeital gains +$2,575 
The total taxable amount is $2,575, regardless of holding period and regardless of 
whether the item is realized or unrealized. Of this total taxable amount, 60% ($1,545) 
is subject to long-term treatment and 40% ($1,030) is subject to short-term treat­
ment. 
In practice, one computes these figures on a separate form (Section 1256) and 
merely enters the two final figures - $1,545 and $1,030- on the tax schedule for cap­
ital gains and losses. Note that if one loses money in nonequity options, he actually 
has a tax disadvantage in comparison to equity options, because he must take some 
of his loss as a long-term loss, while the equity option trader can take all of his loss as 
short-term. 
EXERCISE AND ASSIGNMENT 
Except for a specified situation that we will discuss later, exercise and assignment do 
not have any tax effect for nonequity options because everything is marked to mar­
ket at the end of the year. However, since equity options are subject to holding peri­
od considerations, the following discussion pertains to them. 
CALL EXERCISE 
An equity call holder who has an in-the-money call might decide to exercise the call 
rather than sell it in the options market. If he does this, there are no tax consequences 
on the option trade itself. Rather, the cost of the stock is increased by the net cost of 
the original call option. Moreover, the holding period begins on the day the stock is