Taxes Consolidation Act 1997 section 540

Options and forfeited deposits

Section 540 sets out the capital gains tax rules for the treatment of options, including how the grant, exercise, and abandonment of options are taxed, and how certain options are treated as wasting assets.

• The grant of an option is treated as the disposal of a new asset (the option itself) by the grantor, even where the underlying asset is never bought or sold because the option is abandoned.
• Where an option is exercised, the option and the underlying sale or purchase merge into a single transaction, so that the option consideration is folded into the overall sale proceeds or purchase cost.
• The abandonment of an option by the grantee is a disposal, but generally cannot give rise to an allowable loss — except for quoted options to subscribe for shares, traded options, and options to acquire trade assets.
• An option to buy or sell quoted shares or securities is treated as a wasting asset whose life runs to the earlier of the expiry date or the date it becomes valueless, and a double option (binding the grantor both to buy and to sell) is split into two separate options with half the consideration attributed to each.