Can I Claim the Loss on Unexercised Stock Options?

A stock option is a contract that gives the holder the right to buy or sell a specific quantity of a stock at a particular price on or before a specific date. Options can be sold to another investor, exercised through purchase or sale of the stock or allowed to expire unexercised. Losses on options transactions can be a tax deduction.

When Options Expire

When the holder of a stock option to buy or sell shares allows the option to expire unexercised because the stock price never reached the exercise point, he has lost the money he paid for the option. Internal Revenue Service rules treat the expiration of a stock option as equivalent to a sale of the option for zero dollars on the date it expired unexercised.

How You Lose

Expiration of unexercised stock options creates a capital loss equal to the purchase price of the options. The capital loss will be a short-term loss if you held the options for less than a year, and a long-term loss if you held them for more than a year. For instance, if you bought stock options in April for $5,000 that expired unexercised in October, you would have a $5,000 short-term capital loss on stock options for the tax year.

Claiming Loss

You claim your loss on the unexercised stock options on Form 8949, which feeds into Schedule D where you calculate your net capital loss or gain from all your investments combined. You subtract your $5,000 short-term loss on unexpired stock options first from any net short-term capital gains on other investments, then from any net long-term capital gains. If your end up with a net capital loss, you have a tax deduction.

Taking Deduction

If your only investment in the tax year involved the unexercised stock options on which you lost $5,000, you would end the year with a $5,000 capital loss. You claim the $5,000 loss on Line 16 of Schedule D, but you don’t get to deduct the entire loss in the current year. Current IRS rules limit your tax deduction for capital losses to $3,000 in any one year, so you can only deduct $3,000 from your ordinary income in the current year. You carry the remaining $2,000 in losses forward to next year. When carried over, the $2,000 capital loss will first offset any capital gains next year, then it will offset ordinary income.