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The 1099 that I got from one of my brokers says that my income from buying options last year (minimal - only about $1200) is NOT reported to the IRS by them. Surely though, this is a short-term capital gain taxed at my ordinary income tax rate.

Yes it is.

Or, does the IRS just allow option income under a certain annual $$ level to be tax-free??

Not a chance.

If it is indeed taxable income, then if my broker doesn't report it to the IRS, and I don't report it to the IRS, how do they even know about it and know that I am subject to taxes on it??

They might not know, unless you were audited, just as they might not know about several other sources of income which are not reported. Regardless of ethics, intentionally failing to report income is NOT a good idea.

Options are discussed on pages 52 and 53 of IRS Publication 550, located at

Good Luck,
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