Options Taxes: Short-Term, Long-Term, Wash Sales, and the 60/40 Rule
Options taxation in the US treats most equity options as ordinary capital gains — short-term if held under a year, long-term if longer. But three exceptions can change the math substantially: wash sales, the 60/40 rule on broad-based index options, and the special treatment of LEAPS exercised into stock.
The wash sale rule disallows a loss if you buy a substantially identical security within 30 days of selling for a loss. For options traders, this is a nightmare — selling a losing call and buying another call on the same underlying within 30 days triggers it, even at different strikes in some interpretations. Most active options traders simply accept that wash sales will be common and rely on year-end settlement to net everything out.
The 60/40 rule applies to broad-based index options (SPX, NDX, RUT, VIX) under section 1256: regardless of holding period, 60% of gains are taxed at long-term rates and 40% at short-term rates. This is dramatically more favorable than the all-short-term treatment of equity options. Active premium sellers often migrate to SPX over SPY for this reason alone — the tax savings compound meaningfully over time.
Frequently Asked Questions
Are SPX options really tax-advantaged vs SPY options?
Yes — SPX falls under section 1256's 60/40 treatment; SPY does not. For high-income traders, the savings can exceed 10% of net P&L.
Does the wash sale rule apply to options on the same underlying but different strike?
The IRS hasn't issued definitive guidance, but most tax preparers treat options at different strikes/expirations as not substantially identical. Consult a CPA for your specific situation.