Form 1099-B: Cost Basis and Options Trading

During tax season, traders can expect to receive a Form 1099-B. However, for an option trader, a 1099-B might appear a little different. Here we'll discuss what options traders might expect with their Form 1099-B.

Schwab.com does not provide tax advice. Consider consulting with a tax-planning professional with regard to personal circumstances.

Non-covered basis is the cost basis¹ for securities purchased prior to the date at which reporting by brokers was made mandatory by a tax law passed more than a decade ago.

Since the law passed, brokers are required to report cost basis information on Form 1099-B and to the IRS after the sale of certain securities, including stocks, bonds, options, exchange-traded funds, and mutual funds. Mandatory reporting was rolled out in phases between 2011 and 2016:

• January 1, 2011: Equities
• January 1, 2012: Mutual funds and equities purchased through dividend reinvestment plans
• January 1, 2014: Fixed-rate debt instruments and options
• January 1, 2016: Variable-rate debt instruments and other complex securities

Traders who sell securities purchased prior to the dates listed above may not see cost basis information included on their 1099-B, or it may be incomplete. This doesn't mean the non-covered cost basis isn't reportable; rather, it's not required to be reported by a broker to the IRS. But even though the broker isn't required to report the non-covered cost basis, traders are still responsible for including this information on Schedule D of their tax return.

Schwab clients can view their cost basis information on covered securities by logging in to their account at Schwab.com. Under Accounts, select History and then Realized Gain/Loss to see the total cost basis.

Brokers like Schwab are required to report certain info to the IRS, but it can differ from what individual investors are required to report.

Non-covered securities are tracked at Schwab, but depending on the year the security was purchased (refer to the rollout dates above), the original purchase information may not be available in a client's account.

Current cost basis information, including information about realized gains and losses, is included on Form 1099-B for taxable accounts. The non-covered cost basis will display in the non-covered section of the form but won't be reported to the IRS. Having the cost basis for covered and non-covered securities in one place may help streamline the tax-filing process.

Understanding how options information is reported on a 1099-B can be helpful for option traders during tax season. Below are two example scenarios and explanations for how reporting on the 1099-B works for options.

Let's say a trader bought an XYZ July 2023 95-strike put options contract for $5.30 on September 24, 2022. By the beginning of February 2023, the stock price was continuing to decline and the trader decided to sell it for $1.16. The cost was $5.30, plus transaction costs, and the proceeds were $1.16, minus transaction costs, which the 1099-B would reflect. (The multiplier for standard equity options is 100, so it's really a cost of $530 per contract with proceeds of $116 per contract, not including transaction costs.)

Next, let's switch the scenario to see what happens if a trader sells it to open the position.

What if the trader in the above example sold the XYZ put options contract to open at $5.30, then closed it out with a $1.16 purchase?

The 1099-B will show a proceeds amount of $4.14 ($414 with the multiplier, and it will be modified by transaction costs) and a basis of $0. The IRS mandates that a trader with a cash-settled, written contract report only the gain or loss as proceeds. A tax document will not reflect the $5.30 or $1.16 amounts, just the profit of $414 minus transaction costs.

If this had been a loss, the proceeds amount would be negative.

When a trader "writes an option," it means they're selling an options contract as an opening trade. If the position is closed prior to expiration, the reporting notes the cash difference between the sale price and the purchase price with transaction costs figured in. However, if an options contract is exercised or assigned, it will settle in the underlying security, not cash.

When an options contract expires worthless, the premium and transaction costs paid (for option buyers) will be a loss. Option writers will realize a gain equal to the amount of the cash received (the premium minus transaction costs) for selling the contract.

The chart below illustrates tax reporting based on different options outcomes.

The contract will not be a reportable line item on a trader's 1099 if the contract was exercised/assigned. It's built into the cost or proceeds, depending on the type of transaction.

Did an options exercise or assignment lead to a long position in XYZ? If so, even though the contract is "done," it isn't taxable until the shares of XYZ are sold. Whenever XYZ is sold, the cost basis is the acquisition cost, which is the strike price and the premium adjustment, plus transaction costs.

Options on broad-based indexes like the S&P 500^® index (SPX) are treated differently for tax purposes. Broad-based index options (as well as futures contracts and options on futures) fall under Section 1256² of the IRS tax code and are required to be treated with mark-to-market³ status. This means that even if a trader didn't liquidate a position by the last trading day of the year, the IRS treats it as if they did and uses the closing price of that final trading day to figure the unrealized gain or loss. The closing price is "marked" and used as the cost basis going forward. 

For more in-depth information about reporting, it might make sense to contact a tax professional who can help with forms.