The correct answer is option C) " lying to cover up a mistake is unwise and dishonest."
In this case, the gerund phrase that functions as a subejct is "lying to cover up a mistake".
Gerund phrases start with a gerund (infinitive+ing) and always function as a noun in a sentence. As a noun, they can be subjects or objects.
In the example provided, the gerund "lying" is part of the gerund phrase that acts as subject.