can you write off losses on stock options — comprehensive guide

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Can you write off losses on stock options? If you hold employee stock options or trade exchange-traded options (calls and puts), understanding when you can deduct losses is essential for accurate tax reporting and smarter tax planning. This article explains the differences between employee stock options and traded options, how losses are characterized in the United States and Canada, timing and reporting rules, limits on deductions, wash-sale / superficial loss rules, trader-specific rules, and practical examples you can apply. It also highlights common pitfalls and when to talk to a tax professional.

As of June 1, 2024, according to guidance from the IRS and the Canada Revenue Agency (CRA) and commentary from Canadian financial institutions, rules on employee stock option benefits and option-trade taxation remain materially different between the two countries; the CRA’s special stock option deduction rules (including the $200,000 annual limit for public company options) and the U.S. ISO/NSO and AMT rules are important anchors for taxpayers.

This guide is introductory and neutral in tone; it does not provide tax advice. Keep detailed records of option contracts, exercise notices, trade confirmations, and brokerage year-end statements. For custody, trading, or wallet needs, consider Bitget exchange and Bitget Wallet for consolidated records and trade history features.

Types of stock options and why treatment differs

The question “can you write off losses on stock options” covers two broad contexts:

• Employee stock options: equity compensation granted by an employer (U.S. incentive stock options — ISOs, non-qualified stock options — NSOs; Canadian employee stock options with special tax rules). These are primarily compensation and taxed as employment income in certain events.
• Exchange-traded/OTC options: calls and puts bought and sold on markets by investors (long or short positions), which are generally treated as investment or trading transactions.

Tax treatment differs because employee options are compensation first (tax policy focused on employment benefits), while traded options are investment instruments (tax policy focused on capital vs income characterization). That distinction determines whether a loss is an employment deduction, a capital loss, or ordinary business expense.

Tax treatment of employee stock options

United States — NSOs and ISOs

• NSOs (Non-Qualified Stock Options): When you exercise an NSO, you generally recognize ordinary income equal to the difference between the fair market value (FMV) at exercise and the exercise (strike) price. This income is reported on Form W-2 (if you are an employee) and is subject to payroll taxes. The stock’s tax basis (adjusted cost basis) becomes the exercise price plus the amount reported as ordinary income. If you later sell the acquired shares, any gain or loss compared to that basis is a capital gain or loss. Therefore, a loss on sale of the shares after exercise is a capital loss, not an offset to the employment income previously recognized at exercise.

• ISOs (Incentive Stock Options): ISOs can receive favorable tax treatment if you meet holding-period requirements (generally, hold shares at least two years from grant and one year from exercise). On a qualifying disposition, the entire difference between sale proceeds and exercise price is a capital gain. On an ISO exercise, however, the spread may be an adjustment for the alternative minimum tax (AMT), potentially creating an AMT liability even when no ordinary income is reported for regular tax. If you make a disqualifying disposition (sell before meeting holding periods), the bargain element at exercise is treated as ordinary income, similar to NSOs, and subsequent loss/gain on sale is measured relative to the basis that includes the ordinary income portion. Losses after exercise/sale are capital losses when the stock is disposed of.

Key takeaways (U.S.): you do not typically “write off” a compensation spread at exercise. Losses arise when shares are sold for less than their adjusted basis, and those are capital losses subject to capital loss rules (Form 8949 / Schedule D). AMT can complicate ISO exercises.

Canada — employee stock option specifics

Canadian tax rules treat employee stock options differently. For many qualifying options, an employee recognizes a security options benefit (employment income) when the option is exercised — generally the difference between the FMV of the shares and the exercise price. For options that meet the specific eligibility rules, employees may claim a stock option deduction equal to 50% of that employment benefit, similar in effect to a capital gains inclusion rate — though exact eligibility depends on company type (e.g., Canadian-Controlled Private Corporation (CCPC) vs public company) and other conditions.

Recent rule updates include an annual $200,000 limit on the eligible portion for employees of certain public companies (the $200,000 limit applies to the benefit eligible for the 50% deduction). The security options benefit, adjusted for any deduction, forms part of the employee’s adjusted cost base (ACB) in the shares. If you later sell the shares at a lower amount than your ACB, you will realize a capital loss that can be used as an allowable capital loss subject to CANADA tax rules.

Key Canada points: the compensation element is taxed on exercise; qualifying employees may get a 50% deduction up to limits; losses arise when shares are sold and are treated as capital losses (subject to superficial loss rules and allowable capital loss mechanics).

Tax treatment of traded options (calls and puts)

Buyers of options (long calls/puts)

If you buy an option (call or put), the premium you pay becomes your cost. Tax consequences depend on what happens:

• If you sell a purchased option before expiry, the difference between the sale proceeds and your cost is generally a capital gain or allowable capital loss (Canada) or capital gain/loss (U.S.).
• If a purchased option expires worthless, the holder generally recognizes a capital loss (or ordinary loss if you are in a trading business treated as ordinary income). The loss is recognized in the year of expiry.
• If you exercise a call you bought, the premium paid usually becomes part of the cost basis of the acquired shares. If you exercise a put and sell underlying shares, tax results depend on the net proceeds relative to the shares’ basis.

Writers/sellers of options (covered vs naked)

Sellers (writers) of options receive premiums when they sell contracts. Tax treatment for writers depends on whether they are treated as investors or as traders/businesses and on local tax rules:

• In many investor situations, a premium received by a writer is included in income in the year the option is closed or expires; if exercised, the premium can affect the basis or proceeds associated with the underlying stock transaction.
• Certain jurisdictions or circumstances may permit capital treatment for option-writing profits, but that depends on whether the activity is considered capital in nature.
• In Canada, writers and buyers have distinct guidance (see TaxTips.ca). In the U.S., 1099-B reporting and broker summaries help but taxpayers must classify gains/losses correctly.

Exercising options and basis adjustments

When a purchased option is exercised:

• Call exercise: the option premium paid generally adds to the cost basis of the acquired shares. That adjusted basis is used to compute gain/loss when the shares are later sold.
• Put exercise: the premium may reduce the amount realized on sale, or affect the basis if a cashless exercise or other mechanism is used.

If you reported a gain or loss on the option in an earlier year (for example, selling the option before exercising), you must not double-count. Proper accounting for premiums, proceeds, and basis adjustments is essential.

When can losses be used (deductibility and limits)

Offsetting capital gains

• General rule: capital losses are first used to offset capital gains in the same tax year. If capital losses exceed capital gains, net capital loss carryover/ carryback rules apply.
• United States: net capital losses can offset ordinary income up to $3,000 per tax year ($1,500 if married filing separately). Excess capital losses are carried forward indefinitely to future years. Use Form 8949 and Schedule D to report transactions.
• Canada: allowable capital losses can be carried back up to three years or carried forward indefinitely to offset taxable capital gains in other years; CRA rules and inclusion rate apply (only 50% of capital gains are taxable for individuals, making 50% of capital losses allowable). Use Schedule 3 and Form T1A (if carrying back).

Deducting against ordinary income

• In the U.S., capital losses beyond capital gains can offset ordinary income only up to $3,000 per year; the remainder is carried forward.
• In Canada, allowable capital losses generally cannot be used to directly offset employment or other ordinary income (outside narrow circumstances). Non-capital or business losses may be treated differently.

Limits and special classifications

• Losses on transactions that are recharacterized or disallowed under anti-abuse rules cannot be currently deducted; instead the disallowed amount may be added to the basis of repurchased property (wash-sale / superficial loss adjustments).
• Losses in tax-advantaged accounts (e.g., U.S. IRA, 401(k); Canadian TFSA, RRSP) are generally not deductible and often are not recognized for tax purposes because gains/losses in those accounts are tax-sheltered.

Wash-sale and superficial loss rules

United States — Wash-sale rule

The U.S. wash-sale rule disallows a loss on the sale of a security if you purchase a “substantially identical” security within 30 days before or after the sale. Disallowed losses are added to the basis of the newly purchased position. The wash-sale rule applies to options as well as stocks in many situations — for example, selling a stock at a loss and buying a call option that is substantially identical can trigger wash-sale treatment. Brokers often flag wash sales, but taxpayers are responsible for correct reporting.

Canada — Superficial loss rule

The CRA’s superficial loss rule disallows a loss on a disposition of property if the taxpayer (or an affiliated person) acquires the same or identical property within 30 days before or after the sale and still owns it at the time the loss would otherwise be deductible. A disallowed superficial loss is added to the ACB of the repurchased property. The rule applies to stock and certain derivative strategies and must be considered when tax-loss harvesting.

Practical implications for options

• Selling a stock at a loss and buying a call to retain upside exposure may create a wash-sale / superficial loss issue. Similarly, selling a put or buying options that closely replicate the economic position of the sold shares could block the immediate use of the loss.
• To preserve tax-loss benefits, consider waiting beyond the 30-day window or buying a materially different security that preserves exposure without violating the substantially identical test.

Special rules for traders and businesses

Some taxpayers trade options and securities as a business. If you qualify as a trader in securities (U.S.) or are carrying on a trading business (Canada), different tax treatments may apply:

• U.S. traders may elect mark-to-market under Section 475(f), recognizing gains and losses as ordinary rather than capital, which can simplify loss deduction and eliminate wash-sale complications for many positions. However, the election has specific timing and qualification rules.
• In Canada, whether transactions are business income (ordinary) or capital affects deductibility. The courts and CRA use a facts-and-circumstances test that considers frequency, level of organization, intention, and financing to determine if trading is a business.

Traders should maintain rigorous records and consult tax professionals familiar with trader status rules.

Reporting and forms

United States

• Employee option compensation: NSO income appears on Form W-2; ISO disqualifying dispositions also appear on Form W-2 as ordinary income. AMT effects for ISOs are tracked via Form 6251.
• Broker reporting: brokers issue Form 1099-B showing proceeds from sales, including option transactions. Taxpayers reconcile Forms 1099-B with Form 8949 and Schedule D to report capital gains and losses.
• Capital loss limitations and carryforwards are tracked on Schedule D.

Canada

• Employee option benefits: the security options benefit is reported on the employee’s T4 slip; eligible amounts and the 50% stock option deduction appear on the T1 personal tax return.
• Capital gains/losses: Schedule 3 (T1) is used to report disposals; allowable capital losses are tracked and can be carried back or forward per CRA rules. Use Form T1A to apply for a carryback.

Recordkeeping

Keep trade confirmations, option contracts, exercise notices, year-end brokerage statements, grant documents, and T4/1099 forms. Accurate records support correct ACB calculations and loss reporting and are essential if tax authorities query your returns.

Common tax planning strategies and pitfalls

• Tax-loss harvesting: realize capital losses to offset gains, but be mindful of wash-sale / superficial loss rules. Options can be used for harvesting but require careful timing and selection of materially different securities.
• Preserve quality records: keep detailed documentation of grant terms, exercise dates, premiums, and broker statements.
• Timing exercises and sales: for ISOs, plan around holding-period rules to secure capital gain treatment; for NSOs and Canadian options, weighing the tax at exercise vs expected future gain/loss can affect net after-tax outcomes.
• Beware AMT (U.S.): ISO exercises can create AMT exposure; evaluate AMT before large ISO exercises.
• Employee options vs market trades: do not attempt to offset employment income recognized at exercise with unrelated capital losses — these are different tax categories.
• Consult a tax advisor before executing tax-driven trades or complex option strategies; tax rules are fact-specific and can change.

Call to action: If you trade or hold options and want consolidated transaction history and exportable statements for tax reporting, Bitget’s trade reporting tools and Bitget Wallet can simplify recordkeeping and support tax preparation.

Examples (illustrative scenarios)

• Example 1 — Long call expires worthless: You buy a call for $1,000 premium. The option expires worthless. You generally claim a $1,000 capital loss for the tax year of expiry (or ordinary loss if you are in a trading business classified as ordinary income).

• Example 2 — NSO exercise then sale at a loss (U.S.): You exercise an NSO with a $10,000 spread that is included as ordinary income. Your basis in the shares becomes exercise price plus $10,000. If you later sell the shares at a loss compared to that basis, you claim a capital loss on the sale. The employment income recognized at exercise remains taxed as ordinary income and is not offset by the capital loss against your ordinary wages (except via capital loss rules described earlier).

• Example 3 — Covered call seller: You sell a covered call and receive a premium. If the call expires, many taxpayers treat the premium as ordinary income in the year of expiry unless their overall activity is classified as capital by the tax authority; reporting depends on facts and jurisdiction.

• Example 4 — Selling stock at loss and repurchasing similar ETF within 30 days: Selling a share at a loss and buying an ETF tracking the same stock or a substantially identical holding within 30 days would likely trigger a wash-sale (U.S.) or superficial loss (Canada), disallowing immediate deduction and adding the disallowed amount to the repurchased position’s basis.

Frequently asked questions (FAQ)

Q: Can you write off losses on stock options held inside retirement accounts like an IRA or TFSA? A: No. Losses or gains inside tax-advantaged accounts are generally not deductible or currently taxable. Contributions and withdrawals rules determine tax effects, not realized losses on trades inside the account.

Q: Does an expired option generate a deductible loss? A: For option buyers, an expired option generally results in a capital loss (or ordinary loss if trading as a business) in the year it expires. For writers, tax treatment depends on whether the premium was treated as income and on your tax status.

Q: Can I offset employee option income with capital losses? A: Generally no. Employment income recognized at exercise is taxed as ordinary income and is not directly offset by capital losses. Capital losses may reduce capital gains and potentially offset ordinary income subject to limits (U.S. $3,000/year), but they do not retroactively change employment income recognized at exercise.

Q: Does the wash-sale or superficial loss rule apply to options? A: Yes. Both the U.S. wash-sale rule and the Canadian superficial loss rule can apply to options and option-related strategies if the positions are substantially identical or the same. Exercise caution when tax-loss harvesting with options.

Q: If I qualify as a trader in securities, can I deduct trading losses fully? A: If you properly qualify and (in the U.S.) make a Section 475(f) mark-to-market election, trading gains and losses are ordinary and deductible against ordinary income. The rules and qualification tests are strict — consult a tax pro before relying on trader status.

Jurisdictional differences and where to get help

U.S. vs Canada highlights:

• U.S.: ISOs and NSOs have different tax timing. NSO exercises create ordinary income at exercise; ISOs may create AMT exposure. Capital losses use Form 8949 / Schedule D; excess capital losses offset ordinary income up to $3,000 per year, with indefinite carryforward.
• Canada: Security options benefit taxed at exercise; eligible 50% stock option deduction may apply subject to limits (including the $200,000 cap for certain public company options). Capital losses are allowable losses with 50% inclusion mechanics and can be carried back three years or forwarded indefinitely.

Get help: Because facts matter (e.g., whether you are an employee, the type of employer, the nature of your trading activity), consult a qualified tax advisor licensed in your jurisdiction. Provide your advisor with full documentation: grant letters, option agreements, exercise notices, brokerage statements, and relevant T4/W-2 or 1099 documents.

References and further reading

Sources to consult for authoritative, up-to-date guidance include:

• U.S. Internal Revenue Service (IRS) publications on stock options, capital gains, and the AMT (see forms and instructions for Form W-2, Form 8949, Schedule D, and Form 6251).
• Canada Revenue Agency (CRA) guidance on employee stock options, capital gains and allowable capital losses, and the superficial loss rule.
• Tax and brokerage guidance such as TaxTips.ca on the tax treatment of options, RBC and BMO overviews of employee stock option taxation in Canada, and broker documentation on 1099-B / T-slips for transactional reporting.

As of June 1, 2024, CRA guidance and Canadian institutional summaries note the continued application of the $200,000 annual limit on the eligible portion of the stock option deduction for employees of certain public companies; U.S. ISO/NSO rules and AMT guidance remain relevant for planning large ISO exercises.

Note: This article summarizes general rules and commonly referenced forms and guidance. It is not exhaustive and should not substitute for professional tax advice.

Final notes and next steps

Loss treatment for stock options depends on the type of option, the transaction that created the loss (exercise, sale, expiry), and local tax rules. To answer “can you write off losses on stock options?”: yes in many cases you can claim losses, but how and when you can write them off depends on whether the loss is a capital loss, an ordinary loss, or is disallowed under wash-sale/superficial loss rules. Employee option taxation complicates simple write-offs because compensation recognition often occurs at exercise.

Keep meticulous records and plan exercises and disposals with tax consequences in mind. For streamlined recordkeeping and exportable tax reports, explore Bitget’s trade reporting features and Bitget Wallet to keep your trading and holding records organized for tax time. When in doubt, consult a qualified tax professional.

Ready to organize your option trades and export tax-ready history? Check Bitget’s account reporting tools and Bitget Wallet for consolidated transaction records and easy downloads for your accountant.