Rev. Rul. 71-521

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 2266, C.B. V-1, 13 (1926).

The question presented concerns the proper treatment for Federal income tax purposes to be accorded the premium paid by an individual taxpayer for the purchase of a put option contract ("put").

It is held that the purchase of a "put" (an option to sell a certain number of shares of a certain stock at a fixed price within a specified time) is a transaction entered into without respect to any particular acquisition of shares of the stock named, for which reason the cost of a "put" upon its acquisition should not be entered as a part of the purchase price of any particular block of stock, but should be carried to a deferred account as a capital expenditure made in an incompleted transaction entered into for profit.

If the taxpayer does not exercise the "put", the amount of the premium he paid for it is treated as a loss from the sale or exchange of property under section 1234(b) of the Internal Revenue Code of 1954. If the taxpayer exercises the "put", thereby causing the sale of stock involved in the "put", the cost of the "put" is offset against the price received for the stock in order to compute the amount realized by the taxpayer for purposes of determining his gain or loss on the sale of stock.

I.T. 2266 is superseded, since the position set forth therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.