Tax Treatment by Option Type - Summary
This final section pulls together all the tax rules into a single reference. Use this as a quick-review resource before the exam.
Master Tax Treatment Table
| Option Type | Expiration | Closing Transaction | Exercise/Assignment |
|---|---|---|---|
| Equity options | Short-term gain/loss (buyer: loss of premium; writer: gain of premium) | Short-term (unless Long-term Equity Anticipation Securities (LEAPS) held > 12 months by buyer) | No gain/loss recognized; premium folds into stock basis or proceeds |
| Index options (Section 1256) | 60% LT / 40% ST | 60% LT / 40% ST | Cash-settled; 60/40 rule applies |
| Foreign currency options (Section 1256) | 60% LT / 40% ST | 60% LT / 40% ST | 60/40 rule applies |
| Yield-based options (Section 1256) | 60% LT / 40% ST | 60% LT / 40% ST | Cash-settled; 60/40 rule applies |
Key Rules at a Glance
Equity Options (Individual Stocks)
- Expiration: Premium = capital gain (writer) or loss (buyer), almost always short-term
- Closing: Net premiums = gain or loss, almost always short-term
- Exercise: No gain/loss on the option; premium folds into stock transaction
- LEAPS exception: Buyers who hold > 12 months can get long-term treatment
- Writers: Always short-term, regardless of holding period
Exam Tip: Gotchas
- The 60/40 rule does NOT apply to individual stock options. Only broad-based index, currency, and yield-based options qualify as Section 1256 contracts.
- Writers always get short-term treatment on LEAPS. Only buyers who hold LEAPS > 12 months can get long-term capital gains.
Section 1256 Contracts (Index, Currency, Yield-Based)
- All outcomes: 60% long-term, 40% short-term regardless of holding period
- Mark-to-market: Open positions taxed as if sold on December 31
- Loss carryback: Up to 3 years against prior Section 1256 gains
- Wash sale: Generally exempt
- Reported on: IRS Form 6781
Exam Tip: Gotchas
- Section 1256 contracts are marked to market at year-end. Open positions are taxed as if sold on December 31, even if you did not close them.
Exercise/Assignment Cost Basis Rules
| Scenario | Formula | Creates |
|---|---|---|
| Long call exercised | Strike + premium paid | Cost basis |
| Short call assigned | Strike + premium received | Sale proceeds |
| Long put exercised | Strike - premium paid | Sale proceeds |
| Short put assigned | Strike - premium received | Cost basis |
Memory Aid: Calls ADD, Puts SUBTRACT. Buying stock = cost basis. Selling stock = sale proceeds.
Exam Tip: Gotchas
- No gain or loss is recognized on exercise. The premium folds into the stock's cost basis (buyer) or sale proceeds (writer).
Special Rules
| Rule | Key Point |
|---|---|
| Wash sale (IRC 1091) | Buying a call within 30 days of selling stock at a loss triggers a wash sale |
| Married put (IRC 1233) | Stock holding period suspended while put is open |
| Section 1256 wash sale exemption | Index, currency, and yield-based options generally exempt |
| Writer short-term rule | Writers always get short-term treatment, even on LEAPS |
Exam Tip: Gotchas
- Buying a call within 30 days of selling stock at a loss triggers a wash sale. The wash sale rule applies to options on the same underlying security.