Options & Taxes
Risk Management
Key Takeaways
- Most options trades are short-term capital gains, taxed at your ordinary income rate.
- Premium from expired options is recognized as income in the tax year it expires.
- Assignment adjusts cost basis. Track this carefully for accurate tax reporting.
TL;DR
Options trades generate short-term capital gains (taxed at ordinary income rates). Expired premiums are income. Assignment adjusts cost basis on shares. Watch for wash sale rules when repurchasing similar positions within 30 days. Keep detailed records or use automated tracking tools.
How Options Trades Are Taxed
Options profits and losses are treated as capital gains and losses.
Short-term (held < 1 year): Taxed at your ordinary income tax rate (10-37% depending on bracket).
Long-term (held ≥ 1 year): Taxed at preferential rates (0%, 15%, or 20%).
Since most options trades last days to weeks, virtually all options income is short-term capital gains. Plan accordingly. Set aside 25-35% of profits for taxes.
Tax Scenarios for Sellers
Option expires worthless:
The premium you collected is a short-term capital gain, recognized in the tax year the option expires.
Example: Sold put in December for $300, expires worthless in January → $300 gain in the January tax year.
Closed early (bought back):
Gain/loss = Premium collected − Cost to close.
Example: Sold call for $400, bought back for $150 → $250 short-term gain.
Put assignment:
The premium reduces your stock cost basis. No taxable event until you sell the shares.
Example: Sold $50 put for $2. Assigned. Tax cost basis = $48/share. When you sell shares, that's when the gain/loss is recognized.
Call assignment (shares called away):
Premium is added to your sale proceeds.
Example: Sold $60 call for $3. Shares called away. Tax proceeds = $63/share.
Wash Sale Rules
If you sell a stock or option at a loss and buy a "substantially identical" security within 30 days (before or after), the loss is disallowed for tax purposes. It gets added to the cost basis of the new position instead.
This can bite options traders who:
- Sell a put at a loss, then immediately sell another put on the same stock
- Get assigned on a put, sell the stock at a loss, then sell another put within 30 days
How to avoid: Wait 31 days before re-entering a similar position after taking a loss. Or consult a tax professional if you're trading the same stocks frequently.
Record Keeping
Your broker sends a 1099-B showing options trades, but it often doesn't accurately reflect:
- Adjusted cost basis after assignment (premium offsets)
- The connection between a CSP, the assigned stock, and subsequent covered calls
- Wash sale adjustments for rolling positions
What to track per trade:
- Open date, strike, expiration, premium
- Close date, closing price, P&L
- Assignment details and adjusted cost basis
- Any rolls and their credits
Stanalyst's Options Income tracker handles all of this automatically, linking CSPs to assignments to covered calls and calculating adjusted cost basis at every step.
Tax-Efficient Strategies
Harvest losses in December: Close losing positions before year-end to offset gains. Reopen after 31 days to avoid wash sales.
Use tax-advantaged accounts: Selling options in an IRA eliminates short-term capital gains taxes entirely. Not all brokers allow options in IRAs, but many do (Fidelity, Schwab, Interactive Brokers).
Track everything: The difference between a $48 cost basis and a $50 cost basis (premium adjustment) saves you tax on $200/contract when you sell the shares. Over dozens of trades per year, this adds up significantly.
Put this knowledge to work
Stanalyst's AI analysts find optimal trades based on your strategy, track your premium income, and adjust cost basis automatically.
Start for free