If an Option Expires Worthless, Is It a Capital Loss?

When an option you bought expires worthless, the premium you paid is treated as a capital loss on the expiration date, and yes, you can deduct it. Under 26 U.S.C. § 1234(a), the IRS treats the expired option as though you sold it for zero on the day it expired, producing a capital loss equal to the premium you paid plus any commissions.¹ That loss first offsets your capital gains for the year, and up to $3,000 of any excess can come off your ordinary income. The rest carries forward.

Short-Term or Long-Term Loss?

The character of the loss depends on how long you held the option before it expired. One year or less, and the loss is short-term. More than one year, and it’s long-term.²

This classification matters because of how losses pair up at tax time. Short-term losses first offset short-term gains, which would otherwise be taxed at your ordinary income rate. Long-term losses first offset long-term gains, which are taxed at the lower capital gains rate. Most listed equity options expire within a few months of purchase, so the losses typically land in the short-term bucket.

IRS Publication 550 gives a straightforward example: ten call options bought for $4,000 in April that expire in December produce a $4,000 short-term capital loss.³

How Much You Can Deduct This Year

Capital losses offset capital gains dollar for dollar with no limit. If your capital losses exceed your capital gains for the year, you can deduct up to $3,000 of the excess against ordinary income such as wages. The cap drops to $1,500 if you file as married filing separately.²

Anything above that cap carries forward to future tax years indefinitely. The carryforward keeps its original character: short-term stays short-term, long-term stays long-term. Each year it continues to offset gains and up to $3,000 of ordinary income until it’s used up.²

Say you had a rough year and ended with $15,000 in net capital losses from expired options. You’d deduct $3,000 this year and carry $12,000 forward. With no offsetting gains in future years, you’d be absorbing $3,000 a year for the next four. The IRS doesn’t track your carryforward balance for you, so your own records matter.

Index Options and Futures Follow Different Rules

Not every expired option gets the standard treatment. Broad-based index options, regulated futures contracts, and options on futures are classified as Section 1256 contracts. For these, 60% of any gain or loss is treated as long-term and 40% as short-term, regardless of how long you actually held the position.⁴

The distinction is between equity options and nonequity options. Options on individual stocks like Apple or Tesla are equity options and follow the standard Section 1234 rules. Options on broad-based indexes like SPX or NDX are nonequity options and fall under Section 1256.⁴

If you bought an SPX put for $2,000 and it expired worthless, the $2,000 loss would split into $1,200 long-term (60%) and $800 short-term (40%). Section 1256 contracts are also marked to market on December 31 each year, so even open positions trigger recognition at year-end.⁵

Watch Out for the Wash Sale Rule

The wash sale rule can quietly disallow a loss you thought was locked in. Under 26 U.S.C. § 1091, if you sell a security at a loss and acquire a substantially identical security within 30 days before or after that sale, the loss is disallowed for the current year. The disallowed amount gets added to the cost basis of the replacement position.⁶

The statute defines “stock or securities” to include contracts or options to acquire or sell stock or securities, and it says cash settlement doesn’t provide an escape hatch. So if your XYZ call expires worthless on March 15 and you buy another XYZ call with a similar strike and expiration within 30 days, the loss from the expired option may be disallowed as a wash sale.⁶

One useful exception: wash sale rules don’t apply to Section 1256 contracts, because those are already marked to market at year-end.⁵

If you’re an active trader who routinely rolls into similar positions as one expires, this is the pattern the rule is designed to catch. Give yourself a buffer, or accept that the loss will shift into the basis of the next position.

Reporting an Expired Option on Your Return

Where the loss goes on your tax return depends on what kind of option expired.

Equity Options: Form 8949 and Schedule D

Standard options on individual stocks and ETFs go on Form 8949, Sales and Other Dispositions of Capital Assets. The form specifically handles worthless securities.⁷

Each expired option gets its own line. Use the expiration date as the date sold. Enter zero in the proceeds column, since the option expired with no value. In the cost basis column, enter the premium you paid plus commissions. Your brokerage will usually issue a Form 1099-B with these details, but accurate reporting is still your responsibility.

Totals from Form 8949 flow into Schedule D (Form 1040), which separates short-term and long-term transactions and produces the net figure that transfers to your Form 1040.⁸

Section 1256 Contracts: Form 6781

Broad-based index options, futures options, and regulated futures contracts go on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles. The form does the 60/40 split for you: line 8 computes the 40% short-term portion, line 9 computes the 60% long-term portion, and both figures transfer to Schedule D.⁵

Using the wrong form is a common and costly mistake. Reporting SPX index options on Form 8949 instead of Form 6781 forfeits the favorable 60/40 treatment and can mean overpaying tax. Check your 1099-B: brokerages usually flag Section 1256 contracts separately, but not always.

One Boundary: Sellers Don’t Get a Loss

Everything above assumes you bought the option. If you wrote (sold) an option and it expired worthless, you don’t have a loss — you have a short-term capital gain equal to the premium you collected. Under Section 1234(b), gain on the lapse of an option is always treated as short-term for the grantor, no matter how long the option was open.¹

1
Office of the Law Revision Counsel. 26 U.S. Code 1234 – Options to Buy or Sell
2
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
3
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
4
Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market
5
Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles
6
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
7
Internal Revenue Service. Instructions for Form 8949 Sales and Other Dispositions of Capital Assets
8
Internal Revenue Service. Schedule D (Form 1040)