Tax rate applied to assets held longer than 1 year. For options, the holding period starts at purchase and resets if the option is exercised. Currently taxed at 0%, 15%, or 20%.
⚡ KEY TAKEAWAY: Options held over a year qualify for long-term rates — but selling qualified covered calls is one of the few ways to achieve this. Most active options trades are short-term.
Why It Matters
Long-term rates (0-20%) are significantly lower than short-term ordinary income rates (up to 37%). Most options trades are short-term, but LEAPS and qualified covered calls can achieve long-term treatment.
How It Works
Assets held over 1 year qualify for long-term capital gains. For options: the holding period starts at purchase. If exercised, the holding period of the resulting stock position starts from the exercise date, not the original option purchase.
Example
Buy a LEAPS call in January 2025, sell in February 2026 (13 months). The gain is long-term. But if you exercise the LEAPS and receive shares, the shares' holding period starts at exercise — you'd need to hold another year for long-term.
Common Mistakes
Assuming covered call premium is long-term. The premium received from selling a covered call is always short-term income (it expires or is bought back within the option's life). Only the underlying shares can be long-term.
Tax rate applied to assets held longer than 1 year. For options, the holding period starts at purchase and resets if the option is exercised. Currently taxed at 0%, 15%, or 20%.
Why does Long-Term Capital Gains matter for premium sellers?
Options held over a year qualify for long-term rates — but selling qualified covered calls is one of the few ways to achieve this. Most active options trades are short-term.
How does Long-Term Capital Gains work?
Assets held over 1 year qualify for long-term capital gains. For options: the holding period starts at purchase. If exercised, the holding period of the resulting stock position starts from the exercise date, not the original option purchase.
What are common mistakes with Long-Term Capital Gains?
Assuming covered call premium is long-term. The premium received from selling a covered call is always short-term income (it expires or is bought back within the option's life). Only the underlying shares can be long-term.
