This is the complete guide. If you trade options in the US, bookmark this page.
How Are Bought Options Taxed?
When you buy a call or put, the tax treatment depends on what happens to the contract:
Scenario 1: You Close the Position (Most Common)
You bought a call for $3.00, sold it for $5.00. Your gain is $200 per contract. Tax treatment depends on how long you held it:
In practice, almost every options trade is short-term. Most contracts expire within weeks or months, and barely anyone holds a long option for over a year. So if you're buying options, expect to pay your full ordinary income tax rate on profits.
Example: You buy 5 AAPL January $200 calls for $4.00 each ($2,000 total) in March. You sell them in June for $7.50 each ($3,750 total). Your short-term capital gain is $1,750, taxed at your marginal rate. If you're in the 32% bracket, that's $560 in federal tax.
Scenario 2: The Option Expires Worthless
If your option expires worthless, you have a capital loss equal to the premium you paid. This loss offsets other capital gains, and up to $3,000 per year of excess losses can offset ordinary income.
Scenario 3: The Option Is Exercised
If you exercise a call, your cost basis in the stock is the strike price plus the premium paid. No gain or loss is recognized at exercise — the tax clock restarts on the stock position.
Example: You buy a $150 call for $5.00 and exercise it. Your cost basis in the 100 shares is $155 per share ($150 strike + $5.00 premium). You don't owe any tax until you eventually sell those shares.
If you exercise a put, your proceeds from selling the stock are the strike price minus the premium. The gain or loss depends on your cost basis in the shares you're delivering.
How Are Sold/Written Options Taxed?
Here's the rule most traders don't know: when you sell (write) an option, the premium received is ALWAYS short-term capital gain, regardless of how long the position is open.
Read that again. It doesn't matter if you sell a 6-month covered call and hold it to expiration. It doesn't matter if you sell a LEAPS put 18 months out. The premium from writing an option is always taxed at short-term rates.
This applies to:
Why This Matters for Income Sellers
If you're running a covered call or CSP strategy generating $2,000/month in premium, that's $24,000/year taxed at your ordinary income rate. In the 32% bracket, that's $7,680 in federal taxes — versus $3,600 if it qualified for long-term rates.
This is why understanding the SPX/index option exception (covered below) can save you thousands.
What Happens When a Written Option Expires Worthless?
When you sell a put for $2.00 and it expires worthless, you keep the $2.00 premium as a short-term capital gain. The gain is recognized on the expiration date.
What Happens When a Written Option Is Exercised?
Covered call gets exercised (assigned): Your sale price for the stock is the strike price plus the premium received. The gain or loss on the shares depends on your cost basis in the stock.
Example: You bought MSFT at $350 and sold a $400 call for $4.00. The call gets assigned. Your sale price is $404 ($400 strike + $4.00 premium). Your gain is $54 per share. If you held MSFT for over a year, this entire gain qualifies for long-term capital gains — including the $4.00 premium. This is one of the few situations where a written option can get long-term treatment.
Cash-secured put gets assigned: Your cost basis in the purchased stock is the strike price minus the premium received.
Example: You sold a $140 put on AAPL for $3.00 and get assigned. Your cost basis is $137 per share ($140 strike - $3.00 premium). You don't owe any tax yet — the clock starts on the stock position.
The Wash Sale Trap for Options Traders
The wash sale rule says you can't claim a loss if you buy a "substantially identical" security within 30 days before or after the loss. Most traders know this applies to stocks. Fewer realize it applies to options — and the rules get complicated.
How Wash Sales Apply to Options
The IRS hasn't provided crystal-clear guidance, but here's the general framework:
The Dangerous Scenario
You sell a CSP on AAPL at $170 for $3.00. AAPL drops, and you buy it back for $6.00, taking a $300 loss. Two weeks later, you sell another CSP on AAPL at $165 for $2.50.
That second put could trigger a wash sale, disallowing your $300 loss. The disallowed loss gets added to the cost basis of the new position — you don't lose it forever, but you can't use it now.
For active options traders who sell premium weekly on the same 5-10 stocks, wash sales can defer thousands in losses. Your broker should track this on your 1099-B, but some get it wrong. Use a trade tracking tool like OptionsPilot's trading journal to keep your own records.
How to Minimize Wash Sale Issues
Section 1256 Contracts: The SPX/Index Option Tax Advantage
This is the single biggest tax advantage available to options traders, and most retail traders either don't know about it or don't use it.
Section 1256 contracts receive special "60/40" tax treatment:
This applies regardless of how long you held the position. Even a same-day trade on SPX options gets 60/40 treatment.
Which Options Qualify?
Which Options Do NOT Qualify?
The Tax Savings Are Massive
Let's compare the same iron condor trade on SPY vs SPX:
Scenario: You earn $10,000 in profit from iron condors over the year. You're in the 32% federal tax bracket.
SPY (regular tax treatment): All short-term → $10,000 × 32% = $3,200 in tax
SPX (Section 1256, 60/40):
Annual savings: $1,020 — and that's on just $10,000 in profits. Scale that to $50,000 in annual premium income and you're saving $5,100 per year. Over a 10-year trading career, that's $51,000 in tax savings.
SPX options are also cash-settled (no assignment risk) and European-style (no early assignment). For selling premium, SPX is superior to SPY in almost every way.
Mark-to-Market at Year End
Section 1256 contracts are marked to market on December 31. This means any unrealized gains or losses on open positions are treated as if you closed them on New Year's Eve. You'll owe taxes on unrealized gains, but you can also deduct unrealized losses.
If you have open SPX positions on December 31 and they're profitable, you owe tax on those paper gains — even though you haven't closed the trade.
How Are Spreads Taxed?
Each leg of a spread is taxed independently. This can create odd situations:
Credit spread example: You sell a $150/$145 put spread for $1.50 net credit.
When you close the spread, your net gain or loss is calculated across both legs. In practice, your broker reports the net result, but be aware that wash sale rules can apply to individual legs if you're trading similar spreads frequently.
Iron condor example: All four legs are independent for tax purposes. Since you're writing all outer legs, the premium is short-term. The bought wings are treated based on their holding period (almost always short-term given typical expiration timeframes).
Tax Rate Comparison Table
Here's what you actually pay on options profits at different income levels (2026 rates, single filer):
| Taxable Income | Short-Term Rate | Long-Term Rate | 60/40 Blended Rate |
Notice the 60/40 blended rate is always significantly lower than the short-term rate. For most traders in the $100K-$250K income range, switching from SPY to SPX saves roughly 6-10 percentage points on every dollar of options profit.
Record Keeping Tips for Options Traders
Your broker provides a 1099-B, but it often has errors — especially around wash sales and cost basis for assigned positions. Keep your own records:
Consider using a tax-specific tool like TradeLog or GainsKeeper if you make more than 200 options trades per year. The cost ($100-200/year) pays for itself by catching wash sale errors.
FAQ
Are options always taxed as short-term gains?
Bought options follow standard holding period rules — short-term if held under a year, long-term if over a year. However, sold/written options (covered calls, CSPs, credit spreads) are always taxed as short-term capital gains regardless of holding period. The exception is when a covered call is assigned and the underlying stock was held over one year — the entire gain including premium can qualify for long-term treatment.
What is the 60/40 tax rule for index options?
Under Section 1256, broad-based index options (SPX, NDX, RUT, VIX) receive special tax treatment: 60% of gains are taxed at the long-term capital gains rate and 40% at the short-term rate, regardless of holding period. This means even a same-day SPX trade gets the blended rate. SPY and QQQ options do NOT qualify — only true index options.
Do I have to report expired options on my taxes?
Yes. If you bought an option and it expired worthless, you report it as a capital loss equal to the premium paid. If you sold an option and it expired worthless, you report it as a short-term capital gain equal to the premium received. Expired options should appear on your broker's 1099-B, but double-check — some brokers handle expirations inconsistently.