On June 1,2015,Brady purchased an option to buy 1,000 shares of General,Inc.at $40 per share.He purchased the option for $3,000.It was to remain in effect for five months.The market experienced a decline during the latter part of the year,so Brady decided to let the option lapse as of December 1,2015.On his 2015 tax return,what should Brady report?
A)A $3,000 long-term capital loss.
B)A $3,000 short-term capital loss.
C)A $3,000 § 1231 loss.
D)A $3,000 ordinary loss.
E)None of the above.

Question

Quizplus · Accepted Answer

Since Brady let the option lapse and did not exercise it, he incurred a short-term capital loss of $3,000 (the cost of the option). Options contracts are considered capital assets, and their purchase price is included in the cost basis for tax purposes. Since Brady held the option for less than a year, the loss is considered short-term.

On June 1,2015,Brady Purchased an Option to Buy 1,000 Shares