Quick Answer
Equity options follow standard capital gain/loss rules (short-term unless a LEAPS buyer held more than 12 months); broad-based index, foreign currency, and yield-based options get the 60/40 marked-to-market split regardless of holding period. Wash sales apply to equity options but generally not to 60/40 contracts. Exercise or assignment never triggers option-level gain or loss on either type.
This final section pulls together all the tax rules into a single reference. Use this as a quick-review resource.
What Is the 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 |
| Broad-based index options (60/40) | 60% LT / 40% ST | 60% LT / 40% ST | Cash-settled; 60/40 rule applies |
| Foreign currency options (60/40) | 60% LT / 40% ST | 60% LT / 40% ST | 60/40 rule applies |
| Yield-based options (60/40) | 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 for marked-to-market treatment.
- Writers always get short-term treatment on LEAPS. Only buyers who hold LEAPS > 12 months can get long-term capital gains.
60/40 Marked-to-Market 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 gains on the same type of contract
- Wash sale: Generally exempt
- Reported on: Form 6781 (the contracts-and-straddles return)
Exam Tip: Gotchas
- These 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 rule | Buying a call within 30 days before or after selling stock at a loss triggers a wash sale |
| Put holding-period rule (Sec. 1233) | Same-day married put: no effect (premium adds to stock basis). A put bought later on stock held 12 months or less eliminates the holding period; on long-term stock, no effect |
| Marked-to-market wash sale exemption | Broad-based 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 before or after selling stock at a loss triggers a wash sale. The window runs both directions around the sale, so a repurchase made shortly before the loss sale counts too. The wash sale rule applies to options on the same underlying security.
What Should You Check on Exam Day?
- Can you sort any option scenario into equity (standard) or 60/40 marked-to-market treatment before applying a formula?
- Do you know exercise and assignment never produce option-level gain or loss, only a cost-basis or sale-proceeds adjustment?
- Can you distinguish a same-day married put (no holding-period effect) from a later put on short-term stock (resets the holding period) from a single table lookup?