Upon expiration of a LEAPS contract, what type of capital loss does the buyer incur?

When a LEAPS (Long-term Equity Anticipation Security) contract expires worthless, the buyer incurs a long-term capital loss. This is because LEAPS contracts have expiration dates that are longer than one year from the date of purchase, usually ranging from nine months to three years.

For tax purposes, the duration of the holding period for capital assets is a critical factor in determining the type of loss realized upon disposal. Since LEAPS are classified as long-term securities regardless of the actual time held, any loss incurred at expiration is treated as a long-term capital loss.

Understanding this classification is essential for tax reporting and for investors when considering the tax implications of their investment strategies. A long-term capital loss can be used to offset long-term capital gains and can also be used to reduce ordinary income, subject to certain limits.