Quick Answer
Equity options (on individual stocks) are almost always taxed at short-term capital gains rates regardless of holding period. Index options (SPX, NDX, RUT) get the favorable 60/40 rule — 60% long-term, 40% short-term — under Section 1256. Options that expire worthless are capital losses. Wash sale rules apply to options on the same underlying stock.
Why Options Tax Treatment Is Different From Stocks
Stock investors have one straightforward rule: hold for more than a year and pay the lower long-term capital gains rate. Options traders face a more complex tax landscape — with different rules for equity vs. index options, mark-to-market requirements for some contracts, and several expensive traps around expiration, exercise, and the wash sale rule.
The good news: once you understand the key categories, options taxation is manageable. The two most important concepts to master are equity options (Section 1234) and index options (Section 1256).
This guide covers every scenario: buying to open and selling to close, selling options that expire worthless, what happens when options are exercised or assigned, and how to correctly report everything on your tax return.
Two Tax Regimes: Equity Options vs. Index Options
Equity Options (Section 1234)
Options on individual stocks, non-broad-based ETFs
Tax treatment
Short-term or long-term based on holding period
Holding period
Must hold 12+ months to qualify for long-term rate (rare in practice)
Most common result
Short-term capital gains (ordinary income rates)
Mark-to-market
Not required — only taxed when position closed
Examples
AAPL calls, TSLA puts, SPY options (non-broad-based index)
Index Options (Section 1256)
Broad-based index options: SPX, NDX, RUT, VIX
Tax treatment
60% long-term, 40% short-term — regardless of holding period
Holding period
Irrelevant — 60/40 applies even on same-day trades
Key benefit
Lower blended rate vs. equity options for active traders
Mark-to-market
Required — treated as sold at year-end fair market value
Examples
SPX options, NDX options, RUT options, VIX options
The 60/40 Rule: Rate Advantage Calculated
For a trader in the 37% ordinary income bracket (federal only, ignoring state):
Equity option profit ($10,000)
- Held less than 1 year: 37% rate
- Tax owed: $3,700
- Net after tax: $6,300
Index option profit ($10,000) — Section 1256
- 60% × 20% LTCG = 12%
- 40% × 37% STCG = 14.8%
- Blended rate: 26.8% — Tax: $2,680
- Net after tax: $7,320 (+$1,020 vs. equity)
Note: Rates are for illustration. State taxes and NIIT (3.8%) may apply. Consult a tax advisor for your specific situation.
Tax Treatment by Scenario
Here's how taxes work in every common options situation. Save this as a reference before tax season.
| Scenario | Tax Event? | Character | Notes |
|---|---|---|---|
| Buy call, sell to close at profit | YES — when closed | Short-term (usually) | Holding period rarely exceeds 1 year for options |
| Buy put, sell to close at profit | YES — when closed | Short-term (usually) | Same as call — holding period determines STCG vs LTCG |
| Buy option, expires worthless | YES — at expiration | Short-term capital loss | Full premium paid becomes a loss on expiration date |
| Sell covered call, expires worthless | YES — at expiration | Short-term capital gain | Premium collected is STCG on expiration date |
| Sell covered call, bought to close | YES — when closed | Short-term capital gain or loss | Difference between premium received and buyback cost |
| Sell cash-secured put, expires worthless | YES — at expiration | Short-term capital gain | Full premium collected is a short-term gain |
| Short put assigned — stock delivered | NO tax on assignment | Adjusts stock cost basis | Premium reduces your cost basis in acquired stock |
| Call exercised (you hold stock) | NO tax on exercise | Premium added to stock basis | Option premium increases your cost basis in the stock |
| Index option (SPX, NDX) closed at profit | YES — when closed | 60% LTCG / 40% STCG (Section 1256) | 60/40 applies regardless of holding period — even intraday |
| Index option — mark-to-market Dec 31 | YES — even if not closed | 60% LTCG / 40% STCG | Unrealized gains/losses taxed as of year-end |
The Wash Sale Rule and Options: A Common Trap
The wash sale rule applies to options — and creates some traps that catch experienced traders off guard. Here are the most common scenarios:
Sell stock at a loss, buy a call option on the same stock within 30 days
This triggers the wash sale rule. An option to buy stock is considered substantially identical to the stock itself. The loss from the stock sale is disallowed.
Close an option at a loss, open the same strike/expiration option within 30 days
Same option contracts are substantially identical to each other. Closing at a loss and reopening the same contract within 30 days triggers the wash sale.
Sell stock at a loss, buy a call option on a different strike or longer expiration
If the option has sufficiently different terms (substantially different strike price or expiration), it may not be substantially identical. This is a gray area — consult a tax advisor.
Close an equity option at a loss, immediately open an index option position
Different underlying securities are generally not substantially identical. Swapping from equity options to index options maintains exposure without triggering the wash sale.
Wash Sale Rule — Full Breakdown for Active Traders
The scenarios above cover the options-specific traps — but the full wash sale guide goes deeper on the details that hurt options traders most at year-end: the exact 61-day window (30 days before the loss sale counts too), the IRA cross-account trap where losses are permanently destroyed rather than deferred, and the safe swap pairs options traders use to maintain market exposure through the 31-day window without triggering the rule.
How to Report Options on Your Tax Return
Form 1099-B from your broker
Your broker sends a 1099-B in February/March listing every closed options trade, including proceeds, cost basis, and wash sale adjustments. Review this carefully — brokers do not always correctly identify wash sales across multiple accounts.
Schedule D and Form 8949
All capital gains and losses from options go on Form 8949 and are summarized on Schedule D. Short-term and long-term gains are reported separately. Section 1256 contracts use Form 6781 instead of 8949.
Form 6781 for Section 1256 contracts
If you traded index options (SPX, NDX, RUT, VIX), you must use Form 6781 to report the mark-to-market gains and losses under the 60/40 rule. Your broker's 1099-B will identify these contracts.
Reconcile wash sale adjustments
If you had wash sales, the disallowed loss appears as an adjustment on Form 8949. Make sure the adjusted cost basis shown on your 1099-B reflects the wash sale correctly — errors are common when wash sales cross accounts.
Trader Tax Status: A Special Designation for Active Options Traders
Traders who qualify for Trader Tax Status (TTS) under IRS rules can elect to use mark-to-market accounting (Section 475) for their equity securities and options. Under this election, all gains and losses are treated as ordinary income rather than capital gains — meaning they can fully offset other income without the $3,000 annual capital loss limit.
Benefits of TTS + Section 475
- Trading losses fully deductible against ordinary income (no $3,000 cap)
- Trading expenses deductible as business expenses
- No wash sale rule applies to Section 475 positions
Requirements for TTS qualification
- Trading must be your primary income activity
- Substantial volume (200+ trades per year is a common benchmark)
- Must be trading for your own account, not as an agent
Important: Qualifying for TTS is fact-specific and the IRS scrutinizes it. Work with a tax professional who specializes in trader taxation — the rules are complex and the penalties for incorrect elections can be severe.
Frequently Asked Questions
Are options taxed as short-term or long-term capital gains?
Most equity options are taxed as short-term capital gains because holding periods rarely exceed 12 months. Index options (SPX, NDX, RUT) get the 60/40 rule — 60% long-term and 40% short-term regardless of holding period.
What happens if an option expires worthless?
If you bought an option that expires worthless, the entire premium paid is a capital loss. If you sold an option that expires worthless, the premium collected is a short-term capital gain realized at expiration.
What is the 60/40 rule for index options?
Under IRC Section 1256, broad-based index options (SPX, NDX, RUT, VIX) are treated as 60% long-term capital gains and 40% short-term capital gains, regardless of how long you held the position. This provides a lower blended tax rate than equity options.
Do I owe taxes on options I haven't closed yet?
For equity options, no — only taxed when closed. Section 1256 contracts (index options) are subject to mark-to-market rules and are treated as sold at year-end fair market value even if you haven't closed them.