CGT: Options: effect of expiry

Does CGT event C2 (in subsection 104-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997)) happen when an exchange traded option expires?

Yes, CGT event C2 (in subsection 104-25(1) of the ITAA 1997) does happen when an exchange traded option expires.

The taxpayer purchased exchange traded options.

Some of the options expired and the taxpayer lost their money.

An exchange traded option is a type of futures contract entered into on a futures market of a futures exchange, under which a party acquires an option or right which can be exercised at or before a specified time. An exchange traded option gives the party the right to either: • purchase from, or sell to, the other party a specified quantity of a commodity at a price specified in, or determined in accordance with, the contract; or • be paid by the other party an amount of money which reflects the amount by which a specified number is greater or less than the number of a specified index at the time the option or right is exercised. The index may be either the Australian Stock Exchanges All Ordinaries Price Index or a prescribed index.

CGT event C2 happens if an option ends because it is cancelled, or expires, or is abandoned, surrendered or forfeited (paragraphs 104-25(1)(a), (c) or (d) of the ITAA 1997).

If no amount is received for the expiry of the option, subparagraph 116-30(3)(a)(i) of the ITAA 1997 ensures that the taxpayer is not taken to have received market value capital proceeds.

When an option expires, the taxpayer will make a capital gain if any amount received for the expiry is more than the asset's cost base, and will make a capital loss if any amount received for the expiry is less than the asset's reduced cost base (subsection 104-25(3) of the ITAA 1997).

Note: Subdivision 130-B of the ITAA 1997 deals with rights and options issued to a taxpayer by a company or trust where the taxpayer did not pay or give anything to acquire them.