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option. The open, rather than closed, status of an
unexercised and otherwise unterminated option to buy
(in effect a “call”) was recognized, for Federal income
tax purposes, in A. E. Hollingsworth v. Commissioner,
27 B.T.A. 621, * * * (1933). It is manifest, from the
nature and consequences of “put” or “call” option
premiums and obligations, that there is no Federal
income tax incidence on account of either the receipt
or the payment of such option premiums, i.e., from the
standpoint of either the optionor or the optionee,
unless and until the options have been terminated, by
failure to exercise, or otherwise, with resultant gain
or loss. The optionor, seeking to minimize or conclude
the eventual burden of his option obligation, might pay
the optionee, as consideration for cancellation of the
option, an amount equal to or greater than the premium.
Hence, no income, gain, profits, or earnings are
derived from the receipt of either a “put” or “call”
option premium unless and until the option expires
without being exercised, or is terminated upon payment
by the optionor of an amount less than the premium.
Therefore, it is considered that the principle of the
decision in North American Oil Consolidated v. Burnet,
286 U.S. 417 * * * (1932), which involved the receipt
of “earnings,” is not applicable to receipts of
premiums on outstanding options.
Rev. Rul. 58-234, 1958-1 C.B. at 284, 285, summarizes the tax
treatment of put option premiums as follows:
[T]he amount (premium) received by the writer (issuer
or optionor) of a “put” or “call” option which is not
exercised constitutes ordinary income, for Federal
income tax purposes, under section 61 of the Internal
Revenue Code of 1954, to be included in his gross
income only for the taxable year in which the failure
to exercise the option becomes final.
* * * * * * *
[W]here a “put” option is exercised, the amount
(premium) received by the writer (issuer or optionor)
for granting it constitutes an offset against the
option price, which he paid upon its exercise, in
determining his (net) cost basis of the securities that
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