Chapter 41: Taxes 911 
Alternatively, if the stock had fallen in price by October expiration and the October 
50 call had expired worthless, the call buyer would have lost $525 - his entire net 
cost. If he had held the call until it expired worthless, he would have a short-term 
capital loss of $525 to report among his taxable transactions. 
PUT BUYER 
The holder of a put has much the same tax consequences as the holder of a call, pro­
vided that he is not also long the underlying stock. This initial discussion of tax con­
sequences to the put holder will assume that he does not simultaneously own the 
underlying stock. If the put holder sells his put in the option market or allows it to 
expire worthless, the gain or loss is treated as capital gain, long-term for equity puts 
held more than one year. Historically, the purchase of a put was viewed as perhaps 
the only way an investor could attain a long-term gain in a declining market. 
Example: An investor buys an XYZ April 40 put for 2 points with the stock at 43. 
Later, the stock drops in price and the put is sold for 5 points. The commissions were 
$25 on each option trade, so the tax consequences would be: 
Net sale proceeds ($500 - $25) 
Net cost ($200 + $25) 
Short-term capital gain: 
$475 
-225 
$250 
Alternatively, if he had sold the put at a loss, perhaps in a rising market, he would 
have a short-term capital loss. Furthermore, if he allowed the put to expire totally 
worthless, his short-term loss would be equal to the entire net cost of $225. 
CALL WRITER 
Written calls that are bought back in the listed option market or are allowed to expire 
worthless are short-term capital gains. A written call cannot produce a long-term 
gain, regardless of the holding period. This treatment of a written call holds true even 
if the investor simultaneously owned the underlying stock (that is, he had a covered 
write). As long as the call is bought back or allowed to expire worthless, the gain or 
loss on the call is treated separately from the underlying stock for tax purposes. 
Example: A trader sells naked an XYZ July 30 call for 3 points and buys it back three 
months later at a price of 1. The commissions were $25 for each trade, so the tax gain 
would be: