In mid-September, Bubba sells one XYZ February 50 call at $6. It subsequently expires without being exercised.
How is the premium taxed?
A. Bubba’s cost of the underlying stock is reduced
B. the $600 premium is a capital gain
C. the $600 premium constitutes ordinary income
D. the $600 premium is rolled over into another XYZ call with the next longest expiration date
Explanation: the $600 premium is capital gain. That’s simply how the tax law works.