Series 7 Exam Question 101: Answer and Explanation

Question: 101

An investor purchased a standard option which expired out of the money. How would this transaction be categorized for tax purposes?

• A. A long-term capital loss
• B. A short-term capital loss
• C. An ordinary loss
• D. Ordinary income

Correct Answer: B

Explanation:

B. Options are always taxed as capital gains or capital losses. Because this investor paid for an option that expired out of the money, they had a loss. In order to be a long-term loss, they needed to have purchased a LEAP option with over one year until expiration. So, this was a short-term capital loss.