Quick Answer
Closing a position nets the two premiums against each other: a long holder's gain or loss is sale proceeds minus purchase price, and a short writer's gain or loss is the premium received minus the buyback price. Standard options are almost always short-term on closing; only a LEAPS buyer who held more than 12 months gets long-term treatment, and writers never do.
Beyond expiration, an option can be closed before its expiration date. A closing transaction is when you offset your existing position: a long holder sells, or a short writer buys back. The tax treatment is straightforward: the difference between opening and closing premiums determines the gain or loss.
How Do Closing Transactions Work for Tax Purposes?
- Long option closed: You bought the option, then sold it before expiration
- Gain or loss = Sale proceeds - purchase price
- Short option closed: You wrote the option, then bought it back before expiration
- Gain or loss = Opening premium received - closing purchase price
In both cases, you are netting the two premiums against each other.
What Do Worked Examples of Closing Transactions Look Like?
Long Call Closed at a Profit
- Buy 1 XYZ 50 call at $3
- Later sell 1 XYZ 50 call at $7
- Gain = $7 - $3 = $4 per share ($400)
- Character: short-term (standard option held < 12 months)
Long Call Closed at a Loss
- Buy 1 XYZ 50 call at $5
- Later sell 1 XYZ 50 call at $2
- Loss = $2 - $5 = -$3 per share ($300 loss)
- Character: short-term
Short Put Closed (Buy Back)
- Write 1 XYZ 50 put at $4 (receive $400)
- Later buy back 1 XYZ 50 put at $6 (pay $600)
- Loss = $4 - $6 = -$2 per share ($200 loss)
- Character: short-term (writers are always short-term)
What Determines the Character (Short-Term vs. Long-Term) of the Gain or Loss?
Long-term Equity Anticipation Securities (LEAPS) have special tax treatment compared to standard options.
| Scenario | Tax Character |
|---|---|
| Standard option closed (buyer or writer) | Almost always short-term (expiration < 9 months) |
| LEAPS bought and held > 12 months, then sold | Long-term |
| LEAPS written and held any duration, then closed | Short-term |
The same LEAPS rule from expired options applies here: only buyers can achieve long-term treatment, and only if held more than 12 months before closing.
Exam Tip: Gotchas
- A closing purchase (by a writer) can result in a loss. If the buyback price exceeds the original premium received, the writer has a net loss.
- LEAPS writers never get long-term treatment on closing transactions. Only LEAPS buyers who held more than 12 months qualify for long-term capital gains.
What Should You Check on Exam Day?
- Can you apply the right formula (sale proceeds minus purchase price for a long holder; premium received minus buyback price for a writer) without mixing them up?
- Do you know that a closing purchase can produce a loss for a writer if the buyback price exceeds the original premium?
- Can you correctly identify that only a LEAPS buyer who held more than 12 months gets long-term treatment on a closing transaction?