How Options Are Taxed in the US: A Plain-English Guide

In the United States, most stock options are taxed as capital assets: you have a capital gain or loss when you close the position, when it expires, or (indirectly) when it is exercised or assigned. Options on broad-based indexes such as the S&P 500 are different, because they fall under Section 1256 of the tax code and get a blended 60% long-term, 40% short-term rate no matter how long you held them.

In short: if you buy an option and sell it, your gain or loss is short-term or long-term depending on how long you held it. If you write an option and it expires, the premium is a short-term capital gain. If an option is exercised or assigned, the premium is folded into the cost or sale price of the stock instead of being taxed on its own. Broad-based index options are marked to market at year end and taxed 60/40 on Form 6781. Wash sale and straddle rules can delay losses.

This guide follows IRS Publication 550, Investment Income and Expenses (the edition for 2025 returns, the latest available as of November 2026). It covers federal rules for individual investors, not dealers or people who qualify as traders in securities.

The tax rates that apply

Options do not have their own tax rates. They use the ordinary capital gains system:

Short-term gains (positions held one year or less) are taxed at your ordinary income rate, which runs from 10% to 37% federally.
Long-term gains (held more than one year) get the preferential 0%, 15%, or 20% rates.
Higher earners may also owe the 3.8% net investment income tax on top.

Because most listed options expire within a few months, almost every option gain an ordinary investor realizes is short-term. The exceptions are long-dated contracts held more than a year (LEAPS) and Section 1256 contracts, covered below.

If you buy an option

Publication 550 is direct about the buyer’s side. “If you buy a put or a call, you may not deduct its cost. It is a capital expenditure.” The premium you pay becomes your basis in the option. What happens next depends on how the position ends.

What happens	Tax result for the buyer
You sell the option	Capital gain or loss: sale price minus premium paid. Short or long-term depends on your holding period.
It expires worthless	Capital loss equal to the premium, treated as sold on the expiration date.
You exercise a call	No separate gain or loss. Add the premium to the basis of the shares you buy.
You exercise a put	No separate gain or loss. Subtract the premium from the amount you receive for the shares you sell.

Two holding period details matter. When you exercise a call, Publication 550 says “your holding period for property you acquire when you exercise an option begins the day after you exercise the option.” The time you held the option does not count toward the stock. And buying a put on stock you have held one year or less is generally treated like a short sale, which can wipe out the holding period you had built up. That is a real trap for anyone using protective puts on recent purchases.

Worked example: buying a call

Maple Widgets Inc. (a hypothetical company) trades at $50. You buy one call with a $50 strike for a premium of $2.50. One contract covers 100 shares, so you pay $2.50 x 100 = $250.

You sell it two months later for $4.00. Proceeds are $400. Gain: $400 - $250 = $150 short-term.
It expires worthless. Loss: $250 short-term, dated on the expiration day.
You exercise it. You pay $50 x 100 = $5,000 for the shares. Your basis is $5,000 + $250 = $5,250, or $52.50 a share. Nothing is taxed yet. When you later sell the shares, the holding period starts the day after exercise.

If you write an option

Writing (selling) an option works differently because you receive cash up front but your obligation is still open. Publication 550 says not to include the premium in income when you receive it. Instead, carry it in a deferred account until the obligation expires, is exercised, or is closed.

What happens	Tax result for the writer
It expires	The premium is a short-term capital gain, regardless of how long the option was open.
You buy it back	Short-term capital gain or loss: premium received minus the cost to close.
Your call is assigned	Add the premium to the amount realized on the shares you sell. Gain is short or long-term based on how long you held the stock.
Your put is assigned	Subtract the premium from your basis in the shares you buy. Your holding period starts on the purchase date.

Note the asymmetry: a written option that expires or is closed always produces a short-term result, even if it was open for 13 months.

Worked example: a cash-secured put

You write one Maple Widgets put with a $50 strike for $1.80, collecting $180. The mechanics of the trade are in cash-secured puts explained.

It expires. You report a $180 short-term capital gain in the year it expires.
You are assigned. You buy 100 shares for $5,000. Your basis is $5,000 - $180 = $4,820, or $48.20 a share. No gain is reported on the put itself. The holding period for the shares starts when you buy them.

Worked example: a covered call

You bought 100 Maple Widgets shares three years ago at $40. You write one call with a $55 strike for $2.00, collecting $200.

The call is assigned. You sell the shares for $5,500. Add the premium: amount realized is $5,700. Gain: $5,700 - $4,000 = $1,700 long-term, because you held the stock for more than a year.
You buy the call back for $3.50 ($350). Result: $200 - $350 = $150 short-term capital loss, and you still own the shares.

How covered calls interact with the straddle rules is covered below.

Section 1256: the 60/40 rule for index options

Some options are taxed under a completely different system. Section 1256 contracts include regulated futures and nonequity options. Publication 550 defines a nonequity option as any listed option that is not an equity option, and says this includes “broad-based stock index options.” Its example of a broad-based index is the Standard and Poor’s 500. Cash-settled index options qualify if the SEC has determined the index is broad-based.

Section 1256 brings two rules:

Mark-to-market. Any Section 1256 contract you still hold at the end of the tax year is treated as sold at its fair market value on the last business day of the year. You pay tax on the gain (or claim the loss) even though you did not close the position. That amount then adjusts your gain or loss when you actually close it.
The 60/40 split. Publication 550: “60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. This is true regardless of how long you actually held the property.”

The split can matter a lot. At the top federal rates, a short-term gain is taxed at 37%, while a 60/40 gain is taxed at a blended 0.60 x 20% + 0.40 x 37% = 26.8% (before the 3.8% net investment income tax).

What counts and what does not

Contract	Usual treatment
Options on single stocks	Equity options: normal capital gain rules
Options on a narrow-based index	Equity options: normal capital gain rules
Options on broad-based indexes such as SPX	Nonequity options: Section 1256, 60/40
Options on futures	Generally Section 1256
Options on ETFs such as SPY	Generally treated as equity options, not Section 1256

The ETF row trips people up. SPX (an index option) and SPY (an option on an exchange-traded fund that tracks the same index) look similar, but they are generally taxed differently. The settlement differences are explained in American vs European options. Brokers report Section 1256 results in box 11 of Form 1099-B, so check how your broker classified each product.

Worked example: an SPX option

You buy one S&P 500 index call for $1,000 in February and sell it three weeks later for $4,000. Your $3,000 gain is split:

60% long-term: $1,800
40% short-term: $1,200

If you bought a second contract in December and still held it on December 31 with a $500 unrealized gain, you would report that $500 (split 60/40) for this year, even though the trade is still open.

Form 6781 and the loss carryback

Section 1256 gains and losses go on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles, Part I, and the net flows to Schedule D. Publication 550 notes one benefit unique to these contracts: an individual with a net Section 1256 loss can elect to carry it back three years, but only against net Section 1256 gains in those years. Ordinary capital losses can only carry forward.

Wash sales involving options

The wash sale rule disallows a loss if, within 30 days before or after a sale at a loss, you buy substantially identical stock or securities. Publication 550 lists options explicitly. A wash sale also occurs if you “acquire a contract or option to buy substantially identical stock or securities,” and the rules “apply to losses from sales or trades of contracts and options to acquire or sell stock or securities.”

In practice that means:

Selling stock at a loss and buying a call on the same stock within the 61-day window can trigger a wash sale.
Selling an option at a loss and buying back a substantially identical option can trigger one. Whether options with different strikes or expiries are “substantially identical” depends on the facts, and the IRS has not published a simple test.
Writing a put is not buying an option, but a deep in-the-money put that is very likely to be exercised has been treated as an acquisition. The IRS addressed this in Revenue Ruling 85-87.
Buying in an IRA counts. Publication 550 includes acquiring substantially identical stock for your IRA or Roth IRA. In that case the disallowed loss is not added to the IRA position’s basis, so it can be lost permanently.

A disallowed loss is normally added to the basis of the replacement position, so it is postponed, not erased (except in the IRA case).

Straddles, at overview level

For tax purposes, a straddle is any set of offsetting positions in actively traded personal property. Publication 550 gives a buy-a-call, buy-a-put example on the same stock, strike, and expiry, but the definition is much broader: stock plus a protective put, or many spreads, can also count. The tax definition is not limited to the options strategy of the same name.

The main straddle rule is loss deferral. If you close one leg at a loss while holding an offsetting leg with an unrecognized gain, you can only deduct the loss to the extent it exceeds that unrecognized gain. Publication 550’s example: a $15,000 loss on a closed leg, with $12,750 of unrecognized gain in the open leg at year end, allows only a $2,250 deduction this year. The other $12,750 carries forward.

The qualified covered call exception

Covered calls on stock you own would usually be straddles, but there is an exception for qualified covered calls. Among other conditions, the option must be exchange-traded, have more than 30 days to expiration when written, generally expire within 12 months, and not be “deep in the money” (a defined test based on strike prices just below the stock price). If it qualifies and is not part of a larger straddle, the loss deferral rules do not apply.

Two catches remain even for qualified covered calls. If the call is in the money when written, the stock’s holding period does not include the time you are short the call. And a year-end rule can still apply deferral if you close the option at a loss in one year and the stock is sold at a gain in the next.

Straddle and wash sale rules interact in ways that go well beyond an overview. If you run multi-leg positions across year end, the Form 6781 instructions are the place to start.

Where it all goes on your return

Form 8949 and Schedule D: gains and losses on equity options you closed or that expired, plus stock sales from exercise and assignment. Publication 550 says to enter “Expired” in the relevant column for options that lapsed.
Form 6781: Section 1256 contracts (Part I) and straddles (Part II and III).
Form 1099-B: your broker’s report. Check whether a call you wrote and were assigned on has the premium included in the sale price. If not, Publication 550 explains how to adjust it on Form 8949 with code “E”.

What can go wrong

Assuming all S&P 500 options get 60/40 treatment. Index options generally do; ETF options generally do not.
Forgetting mark-to-market. An open SPX position on December 31 creates taxable gain this year, even if it later turns into a loss.
Double-counting premiums after assignment. Once the premium is folded into the stock’s basis or sale price, it should not also appear as a separate option gain.
Resetting a holding period by accident. Buying a put on stock held a year or less, or writing an in-the-money covered call, can stop the clock on long-term treatment.
Triggering a wash sale across accounts. Your IRA and your spouse’s account count.
Treating yourself as a trader. Trader status and the mark-to-market election under Section 475(f) have their own rules and are beyond this guide.

The short version

Equity options are capital assets: the buyer’s premium is a cost, the writer’s premium is deferred until the option ends, and exercise or assignment folds the premium into the stock’s basis or sale price. Broad-based index options are Section 1256 contracts, marked to market each December 31 and taxed 60% long-term and 40% short-term on Form 6781. Wash sale rules reach options, and straddle rules can defer losses on offsetting positions, with a narrow exception for qualified covered calls. Before trading, it helps to understand what an option is mechanically, because the tax result follows directly from how the contract ends.

This is general education, not tax or legal advice. Tax rules depend on your circumstances and change over time. For decisions about your own return, consult a qualified tax professional or the IRS directly.