Contributed by: KeriC, FreeTaxUSA Agent, Tax Pro
Stock options purchased on the open market do not need to be reported to the IRS. However, when you sell a stock option on the open market, the sale must be reported on Schedule D of your tax return.
If you sell stocks or options that you have held for one year or less and make a profit, the gains will be taxed as ordinary income. This means the gains will be taxed at the same rates as your regular income.
If you sell stocks or options that you have held for one year or more and make a profit, the gains are taxed at capital gains rates, which are usually lower than ordinary income tax rates.
Purchased Options
If you purchased an option that expired without being exercised, follow this menu path: Income > Investments and Savings > Add an Investment > choose Stock Sales (1099-B). Proceed to the Tell us about your stock sale screen and follow these steps:
- Enter the Investment Description
- Enter the date acquired as the purchased date of the option.
- Enter the sold or disposed date as the date the option expired.
- Enter zero as the sales proceeds.
- Enter the cost basis as the amount you paid for the option.
- Continue and check the box indicating the option expired.
Sold Options
If you sold (wrote or granted) an option that expired without being exercised, follow the menu path above. On the Tell us about your stock sale screen follow these steps:
- Enter the investment description.
- Enter the date acquired as the date the option expired.
- Enter the sold or disposed date as the date the option expired (same as acquired date).
- Enter the sales proceeds as the amount you received for selling the option.
- Enter zero as the cost basis.
- Continue forward, uncheck the box indicating the option expired.
Section 1256 Contracts and Straddles
Section 1256 contracts include regulated futures contracts, foreign currency contracts, options, dealer equity options, and dealer securities futures contracts. These investments are considered "sold" at year-end (even if the positions are not actually closed) for tax purposes and are assigned their fair market value in order to determine gains and losses. If you have a section 1256 contract on your K-1, you can enter it in the Business Income section of the application.
Otherwise, you can enter contracts and straddles reported to you on Form 1099-B by following this menu path: Income > Uncommon Income > Contracts and Straddles.
