Taxes for option sellers
Learn the U.S. federal tax mechanics behind ordinary written equity options and selected index options. Trace premium into option gain, stock basis, or sale proceeds, then examine holding periods, wash sales, and Section 1256.
By OptionsKing. Publisher and editorial methods.
Learning path
Start with cost basis and proceeds, then holding periods and gain character. Next study wash sales and Section 1256 contracts.
By the end, you should be able to reconcile an illustrative transaction history and identify the facts a tax preparer needs. These lessons explain mechanics; they do not determine your individual return.
Lessons
- Wash sales and options: timing, basis and account typesA stock loss may not be deductible immediately if you replace the position within the wash-sale window. Learn how put assignment can trigger the rule, how the deferred loss changes replacement-share basis, and which option situations need individual tax review.
- Capital gains on assigned shares: premium and holding periodsOption premium and share gains do not all follow the same tax rules. Trace a put assignment through a later call-away to see when income is recognized, which holding period matters, and why cash received can differ from current taxable gain.
- Cost basis after assignment: count each premium onceAn assigned put changes share basis; an exercised call changes sale proceeds. Use one position's transaction history to separate those adjustments from expired premium and avoid counting the same credit twice.
- Section 1256 index options: tax treatment and contract differencesSome broad-based index options receive Section 1256 treatment: year-end mark-to-market and a 60% long-term, 40% short-term split. Compare that treatment with equity options while accounting for contract size, settlement, and the risks of the actual position.
Know the scope of the examples
The examples use the risk series' simulated account and IRS Publication 550. Rates such as 32% and 15% are assumptions, not a statement of your bracket. State taxes, account type, straddles, special elections, and other facts can change the result.
Track each contract's actual ending and the affected stock lot. Receiving premium, realizing economic gain, and recognizing taxable income can happen at different times. Confirm current rules and transaction-specific treatment before filing.
Common questions
How is expired written equity-option premium treated?
In the ordinary nondealer examples here, it is short-term capital gain regardless of how long the option was open. Exercised options and Section 1256 contracts follow different rules.
What is share basis after put assignment?
Initially, the strike less that put's premium. Other adjustments, such as a disallowed wash-sale loss, may apply. Unrelated expired premium does not reduce the lot's tax basis.
Can put assignment trigger a wash sale?
Yes. Assignment buys shares, so it can be a qualifying replacement around a loss sale. Check both sides of the 30-day window and other relevant accounts.
How can index-option treatment differ?
Qualifying Section 1256 contracts generally use year-end mark-to-market and a 60% long-term, 40% short-term split. Similar ETF exposure does not imply the same tax classification.
Run your own numbers
Sources
Rules and thresholds above were checked against these documents on August 6, 2026. Exchange and broker rules change. Confirm anything you are about to act on with your own broker.