[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1234-3]

[Page 316-317]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1234-3  Special rules for the treatment of grantors of certain 
options granted after September 1, 1976.

    (a) In general. In the case of the grantor of an option (including 
an option granted as part of a straddle or multiple option), gain of 
loss from any closing transaction with respect to, and gain on the lapse 
of, an option in property shall be treated as a gain or loss from the 
sale or exchange of a capital asset held not more than 1 year. (6 months 
for taxable years beginning before 1977; 9 months for taxable years 
beginning in 1977).
    (b) Definitions. The following definitions apply for purposes of 
this section.
    (1) The term closing transaction means any termination of a 
grantor's obligation under an option to buy property (a call) or an 
option to sell property (a put) other than through the exercise or lapse 
of the option. For example, the grantor of a call may effectively 
terminate his obligation under the option by either:
    (i) Repurchasing the option from the holder or
    (ii) Purchasing from an options exchange a call with terms identical 
to the original option granted and designating the purchase as a closing 
transaction.

A put or call purchased to make a closing transaction is identical as to 
striking price and expiration date. Such put or call need not match the 
granted option in time of creation, date of acquisition, cost of the 
entire option or units therein, or number of units subject to the 
option. If such put or call terminates only part of a grantor's 
obligation under the granted option, a closing transaction is made as to 
that part.
    (2) The term property means stocks and securities (including stocks 
and securities dealt with on a when issued basis), commodities, and 
commodity futures.
    (3) The term grantor means the writer or issuer of an option.
    (4) The term straddle means a simultaneously granted combination of 
an option to buy and an option to sell the same quantity of property at 
the same price during the same period of time.
    (5) The term multiple option means a simultaneously granted 
combination of an option to buy plus an option to sell plus one or more 
additional options to buy or sell property.
    (c) Nonapplicability to broker-dealers. The provisions of this 
section do not apply to any option granted in the ordinary course of the 
taxpayer's trade or business of granting options. However, the 
provisions of this section do apply to:
    (1) Gain from any closing transaction with respect to an option and 
gain on lapse of an option if gain on the sale or exchange of the option 
would be considered capital gain by a dealer in securities under section 
1236(a) and the regulations thereunder, and
    (2) Loss from any closing transaction with respect to an option if 
loss on the sale or exchange of the option would not be considered 
ordinary loss by a dealer in securities under section 1236(b) and the 
regulations thereunder.

The preceding sentence shall be applied with respect to dealers in 
property (as defined in paragraph (b)(2) of this section) and without 
regard to the limitation of the applicability of section 1236 to dealers 
in securities.

[[Page 317]]

    (d) Nonapplicability to compensatory options. Section 1234 does not 
apply to options to purchase stock or other property which are issued as 
compensation for services, as described in sections 61, 83, and 421 and 
the regulations thereunder.
    (e) Premium allocation for simultaneously granted options. The 
allocation of a premium received for a straddle or multiple option 
between or among the component options thereof shall be made on the 
basis of the relative market value of the component options at the time 
of their issuance or on any other reasonable and consistently applied 
basis which is acceptable to the Commissioner.
    (f) Effective date. This section, relating to special rules for the 
treatment of grantors of certain options, shall apply to options granted 
after September 1, 1976.

[T.D. 7652, 44 FR 62282, Oct. 30, 1979; 44 FR 67657, Nov. 27, 1979]