Options Trading Capital Gains Tax Rate: 2025-2026 Rates and How They Apply

Summary

Most options trades are taxed as short-term capital gains at your ordinary income rate, ranging from 10% to 37% federally. Long-term rates of 0%, 15%, or 20% only apply to options held over 12 months (rare) or to the long-term portion of Section 1256 index options. High-income earners also pay an additional 3.8% Net Investment Income Tax (NIIT) on top of capital gains rates.

Key Takeaways

If you sell weekly covered calls, trade credit spreads, or day trade options, your effective federal tax rate on profits is your ordinary income rate. The 15% long-term rate that stock investors enjoy rarely applies to options strategies. The exception is Section 1256 index options (SPX, RUT), which get 60/40 treatment with a blended max rate of about 26.8%. The NIIT adds 3.8% for individuals earning over $200,000 ($250,000 married filing jointly).

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"What's my tax rate on options?" is the most common question I get from new options traders. The answer depends on exactly what you're trading and how long you hold.

2025-2026 Short-Term Capital Gains Rates

Short-term capital gains are taxed as ordinary income. For 2025:

| Filing Status: Single | Rate | $0 - $11,92510% $11,926 - $48,47512% $48,476 - $103,35022% $103,351 - $197,30024% $197,301 - $250,52532% $250,526 - $626,35035% Over $626,35037%

Most active options traders fall in the 24-35% range when combining their regular income with trading profits.

Long-Term Capital Gains Rates

For positions held over 12 months:

Filing Status: SingleRate $0 - $48,3500% $48,351 - $533,40015% | Over $533,400 | 20% |

To get these rates on options, you'd need to buy a LEAPS call in January 2025 and sell it after January 2026. Few income-focused options strategies qualify.

Net Investment Income Tax (NIIT)

The 3.8% NIIT applies to the lesser of your net investment income or the amount by which your modified AGI exceeds $200,000 (single) or $250,000 (MFJ). Options profits count as investment income.

A single filer making $180,000 salary + $50,000 options profit has a MAGI of $230,000. The NIIT applies to $30,000 (the excess over $200,000), adding $1,140 in additional tax.

Real Tax Rate Scenarios

Scenario 1: Covered Call Seller

  • Salary: $85,000
  • Options premium income: $18,000
  • Total income: $103,000
  • Marginal rate on options income: 22% federal + 3.8% NIIT (if applicable) + state
  • Federal tax on $18,000 options income: ~$3,960

    • Scenario 2: Active Spread Trader

  • Salary: $140,000
  • Net options profits: $60,000
  • Total income: $200,000
  • Marginal rate: 32% federal + 3.8% NIIT + state
  • Federal tax on $60,000: ~$21,480

    • Scenario 3: SPX Index Options Trader (Section 1256)

  • Same $60,000 profit but from SPX options
  • 60% at 15%: $36,000 × 15% = $5,400
  • 40% at 32%: $24,000 × 32% = $7,680
  • Federal tax: ~$13,080 + NIIT
  • Savings vs. Scenario 2: ~$8,400

    • State Taxes on Options

    State taxes add another layer. Some highlights:

  • California: Taxes all capital gains as ordinary income (up to 13.3%)
  • New York: Up to 10.9% state + 3.876% NYC
  • Texas, Florida, Nevada, Wyoming, Washington, Tennessee: No state income tax on options profits
  • Illinois: Flat 4.95%

    • A California trader in the 35% federal bracket paying 13.3% state has an effective rate near 49% on short-term options gains. The same trader in Texas pays 35%.

    Strategies to Reduce Your Effective Rate

  • Trade SPX instead of SPY for automatic 60/40 treatment (saves 10+ points on the tax rate)
  • Use Roth IRA for income strategies (0% tax rate)
  • Hold LEAPS over 12 months when your investment thesis supports it
  • Harvest losses throughout the year to offset gains
  • Consider trader tax status and the Section 475 election if you day trade
  • Track everything with OptionsPilot so you have clean records at tax time

    • Don't Forget Estimated Payments

    If options trading adds $10,000+ to your annual income, you likely need to make quarterly estimated tax payments. Underpayment penalties are typically 8% annualized on the shortfall. Set aside 30-35% of net options profits in a separate account for taxes.