Series 7 Exam Question 254: Answer and Explanation

Question: 254

If an investor buys a three-year LEAPS contract on issuance, which expires unexercised, what is the investor's tax consequence at expiration?

• A. Short-term capital loss
• B. Long-term capital gain
• C. Long-term capital loss
• D. Short-term capital gain

Correct Answer: C

Explanation:

C. Options are always taxed as capital gains or capital losses. This investor purchased an option that expired worthless, and, therefore, they lost money. Because the investor held the LEAP for over one year, it's taxed as a long-term capital loss.