Options and the tax return: the three ways a trade ends

This is general information about US taxable brokerage accounts, not tax advice. The details depend on your own situation, and a tax professional can tell you what applies. What follows is the shape of how option trades land on a return, because the shape is what surprises people.

Selling an option isn't income yet

When you sell a put and collect $120, nothing is reported. The premium sits in suspense until the position ends, and how it ends decides the treatment. There are three endings.

Ending one: it expires

An option you wrote that expires worthless produces a gain of the full premium, recognized in the tax year of expiration. It's a short-term capital gain regardless of how long the option was open, a rule specific to written options. Sell a 13-month put, let it expire, and the gain is still short-term.

Ending two: you close it

Buy the option back and the difference between what you collected and what you paid is a short-term capital gain or loss, recognized on the closing date. A roll is a close followed by a new open, so each roll realizes the first leg's result in that tax year.

Ending three: you're assigned

No separate gain or loss is reported on the option. The premium folds into the stock transaction instead. Assigned on a short put: the premium reduces your cost basis in the shares. A $45 put sold for $1.20 gives you shares with a basis of $43.80, and the holding period for those shares starts at assignment. Assigned on a short call: the premium is added to your sale proceeds, so a $55 call sold for $0.90 means you sold the shares at $55.90, with the gain's character set by how long you'd held the stock.

Long options, briefly

Buy an option and sell it, and it's a capital gain or loss with the character set by how long you held the option: long-term if more than a year, which is possible with LEAPS. If it expires, it's a loss on the expiration date. Exercise a call and the premium adds to the stock's basis; exercise a put and the premium reduces the proceeds.

Wash sales

A loss on a stock is disallowed if you buy substantially identical stock within 30 days before or after, and options on that stock can trigger the rule. Sell shares at a loss and then sell a put on the same stock inside the window, and the IRS can treat the put as a replacement position, particularly if it's deep in the money. Brokers only track wash sales inside one account and for identical securities. Across accounts, and across stock versus option, the tracking is yours.

Index options: Section 1256

Options on broad-based indexes, SPX, XSP, NDX, RUT, and VIX options among them, are Section 1256 contracts. Gains and losses are treated as 60% long-term and 40% short-term no matter how long you held them, open positions are marked to market at year end, and the wash-sale rule doesn't apply. For a short-term trader that's a meaningfully lower rate. SPY, QQQ, and IWM are ETFs, not indexes; their options are ordinary equity options and get none of this. Two products tracking the same thing, two tax regimes.

Covered calls and dividends

Writing an in-the-money call against stock you own can suspend the stock's holding period, which affects whether an eventual gain is long-term and whether dividends you receive qualify for the lower rate. Out-of-the-money calls with more than 30 days to expiration generally avoid this under the qualified covered call rules. If you hold shares for their dividends and sell calls against them, this is the rule to look up.

What the broker sends you

A 1099-B listing each closed position with proceeds, basis, dates, and whatever wash-sale adjustments it tracked. Check it against your own log. Premium from assigned options is folded into share basis and can look wrong at first glance. Keep the log through the year and reconciling in February is an hour, not a weekend.