How Are LEAPS Taxed?

LEAPS options follow the same general tax rules as other equity options, but their long expiration dates create unique tax planning opportunities. The key question: can your LEAPS gains qualify for the lower long-term capital gains rate?

The short answer: yes, if you hold the LEAPS for more than one year before selling.

The Holding Period Rule

The IRS applies a simple test: did you hold the asset for more than one year?

  • Held over 12 months: Long-term capital gains rate (0%, 15%, or 20% depending on income)
  • Held 12 months or less: Short-term capital gains rate (taxed as ordinary income, up to 37%)

    • For a high-income trader in the 35% bracket, the difference between short-term and long-term rates on a $10,000 LEAPS profit is:

    | Tax Treatment | Rate | Tax on $10,000 Gain | Short-term35%$3,500 | Long-term | 15% | $1,500 |

    That is $2,000 saved by holding one extra day past the one-year mark.

    When the Holding Period Starts and Ends

    Your holding period starts the day after you buy the LEAPS. If you purchase a LEAPS call on March 15, 2025, you need to sell it on March 16, 2026 or later to qualify for long-term treatment.

    The holding period ends when you close the position. Selling the LEAPS, letting it expire, or exercising it all terminate the holding period on that date.

    Exercising LEAPS: Tax Implications

    If you exercise a LEAPS call, the tax treatment changes. The premium you paid for the LEAPS becomes part of your cost basis in the stock. No taxable event occurs at exercise.

    Example: You buy a LEAPS call for $3,000 with a $150 strike. You exercise when the stock is at $200. Your cost basis in the 100 shares is $150 + $30 (premium per share) = $180 per share. A new holding period starts on the day you exercise for the stock.

    This is important: even if you held the LEAPS for 18 months, exercising resets the clock on the stock. You need to hold the stock for another 12+ months to get long-term treatment on the shares.

    Rolling LEAPS and Tax Consequences

    Rolling is treated as two separate transactions: selling the old LEAPS (taxable event) and buying a new one (new holding period starts). If you roll at 9 months to avoid theta decay, the gain is short-term. Some traders wait until the 12-month mark to roll specifically to capture long-term treatment.

    Wash Sale Considerations

    The wash sale rule can apply to LEAPS. If you sell a LEAPS call at a loss and buy a substantially identical option within 30 days before or after, the loss is disallowed and added to the cost basis of the new position.

    "Substantially identical" for options is not precisely defined by the IRS, which creates ambiguity. A LEAPS call at the same strike and expiration on the same stock is clearly substantially identical. Different strikes or expirations are less clear, but many tax professionals advise caution.

    Tax Planning Strategies

    Buy LEAPS early to start the clock. The 12-month requirement is easily met on 18-24 month positions. Track your purchase date. Many traders lose thousands by selling a few days too early. Use retirement accounts. In a Roth IRA, LEAPS gains are entirely tax-free regardless of holding period.

    Common Mistakes

  • Selling a profitable LEAPS at 11 months when waiting one more month saves thousands in taxes
  • Assuming exercised LEAPS carry over the holding period to the stock (they do not)
  • Forgetting that rolling creates a taxable event
  • Ignoring wash sale rules when re-entering a LEAPS position after a loss

    • This is not tax advice. Consult a tax professional for your specific situation. The rules around options taxation have nuances that depend on individual circumstances.