Options Selling Taxes (US): Section 1256, Short-Term Gains, and Wash Sales

In the US, premium from most equity options is treated as a capital gain or loss. If you sell a put or call and it expires worthless, the premium is generally a short-term capital gain in the year the position closes—regardless of how long the contract was open. Buying a short option back to close realizes the difference between the credit and the debit.

The IRS overview of capital gains and losses is Topic No. 409, with detail on options, premiums, and holding periods in Publication 550.

Two short examples show how the same premium is treated differently depending on the outcome.

The covered-call side mirrors this: if a call is assigned, the premium adds to your sale proceeds. How assignment works mechanically is in options assignment explained, and the wheel chains these events together in the wheel strategy.

Broad-based index options—such as options on SPX, NDX, and similar—are often Section 1256 contracts. These are marked to market at year end and taxed 60% long-term and 40% short-term, regardless of holding period. For many active sellers in higher brackets, that blended rate is meaningfully lower than the all-short-term treatment of equity options.

Section 1256 gains and losses are reported on IRS Form 6781. This favorable treatment is one reason some premium sellers prefer index products—see SPY vs. SPX vs. single stocks. Product classification can be nuanced, so confirm a specific symbol's treatment with a professional.

The wash-sale rule can defer a loss if you buy back a substantially identical position within 30 days before or after closing it at a loss. Active sellers who repeatedly sell the same strikes—or roll positions—can trigger wash sales without realizing it, pushing the disallowed loss into the cost basis of the replacement trade.

A quick illustration: you close a short put for a $300 loss, then sell the same strike again a week later. That loss may be disallowed for now and added to the new position's basis—deferred, not erased. Rolling mechanics that can trigger this are covered in how to roll options.

Brokers issue a 1099-B summarizing proceeds, basis, and wash sales, but their accounting can differ from your own—especially across multiple accounts, or when assignments and rolls span the year boundary. Reconciling the 1099-B to your records is what catches errors before they reach your return.

This is general information about reporting, not advice on your filing—when in doubt, a tax professional reconciles these for you.

A consistent journal—reconciled to your broker—turns a year of trades into a clean summary. Importing trades directly keeps it accurate; see IBKR Flex Query for options traders and why keep an options trading journal. The capital side—what was actually tied up—is in return on capital for option sellers.

This is general education, not personal tax or financial advice—rules change and depend on your situation and jurisdiction. Consult a qualified tax professional. More in the blog.