On June 1, 2018, 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, 2018. On his 2018 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 decided to let the option lapse and did not exercise it, he incurred a short-term capital loss equal to the amount paid for the option, which is $3,000. The holding period for an option is always short-term. Therefore, the correct answer is B, a $3,000 short-term capital loss. The other options (A, C, D, and E) do not apply to this scenario.

On June 1, 2018, Brady Purchased an Option to Buy