How to Avoid Tax on Options Trading?

I. Introduction: Navigating the Complex Tax Landscape of Options Trading

A. The Challenge of Options Taxation

Options trading presents unique opportunities for investors but also introduces significant tax complexities compared to more straightforward investments like simply buying and holding stock.¹ The tax treatment of options transactions is multifaceted, depending heavily on numerous factors including the type of option (equity vs. non-equity), the trader’s position (long buyer vs. short seller/writer), the outcome of the position (expiration, closing sale, exercise, or assignment), the holding period involved, and potentially the trader’s overall tax classification (investor vs. trader).¹ This intricate web of rules necessitates a thorough understanding and careful planning to manage tax liabilities effectively.⁵

B. Objective: Legal Tax Minimization, Not Evasion

This report aims to provide a comprehensive overview of the legitimate strategies and rules within the U.S. Internal Revenue Code (IRC) that options traders can utilize to minimize their tax burden legally. The focus is on understanding how different actions and choices impact tax outcomes, enabling informed decisions for greater tax efficiency. It is crucial to distinguish these strategies from illegal tax evasion, which involves deliberately misrepresenting income or ignoring tax obligations and falls outside the scope of this analysis. The objective is to optimize taxes through compliance and strategic application of existing tax law.

C. Importance of Professional Advice

The information presented herein is based on general interpretations of tax laws and regulations as reflected in the referenced materials. Tax laws are complex and subject to change, and their application can vary significantly based on individual circumstances. This report does not constitute personalized tax advice. Options traders are strongly encouraged to consult with a qualified tax professional who specializes in investment taxation. Such an advisor can provide guidance tailored to specific financial situations, trading patterns, and goals, ensuring compliance and optimizing tax strategies within the legal framework.³

related posts : Best Binary Options Brokers (in 2025)

II. Foundational Tax Principles for Options Traders

A. Capital Gains vs. Ordinary Income in Options Trading

The cornerstone of options taxation lies in understanding how profits and losses are classified. Generally, gains and losses derived from trading options listed on exchanges are treated as capital gains or losses.³ This classification is pivotal because capital gains, particularly long-term capital gains, often benefit from lower tax rates compared to ordinary income.⁸ Ordinary income, which includes wages, salaries, and interest, is taxed at marginal rates that can reach up to 37% (as of 2024), whereas long-term capital gains face preferential rates.

While most exchange-traded options fall under the capital gains regime, certain situations, primarily involving employee stock options (ESOs), can result in ordinary income treatment. For instance, exercising Non-Qualified Stock Options (NSOs) typically generates ordinary income equal to the difference between the exercise price and the stock’s fair market value at the time of exercise.³ Similarly, Incentive Stock Options (ISOs), while potentially qualifying for capital gains treatment, can trigger ordinary income if specific holding period requirements are not met after exercise.¹² Although ESOs are distinct from market options trading, recognizing this difference provides a broader context for how options-related income can be taxed. For the typical options trader engaging in the open market, the focus remains primarily on the capital gains framework.

B. The Critical Role of Holding Periods: Short-Term vs. Long-Term

Within the capital gains framework, the holding period of an asset is paramount in determining the applicable tax rate. The IRC distinguishes between short-term capital gains/losses (assets held for one year or less) and long-term capital gains/losses (assets held for more than one year).⁸

This distinction carries significant financial weight. Short-term capital gains are taxed at the individual’s ordinary income tax rates, which are tiered based on income level and can be substantial.⁸ Conversely, long-term capital gains are taxed at preferential rates, which are 0%, 15%, or 20%, depending on the taxpayer’s overall taxable income.⁸ Achieving long-term capital gains treatment is therefore a primary objective for tax-efficient investing.

Table 1: 2024 Federal Capital Gains Tax Rates

Filing Status	Taxable Income for 0% Long-Term Rate	Taxable Income for 15% Long-Term Rate	Taxable Income for 20% Long-Term Rate	Corresponding Short-Term Rates (Ordinary Income)
Single	Up to $47,025	Over $47,025 up to $518,900	Over $518,900	10% – 37%
Married Filing Jointly	Up to $94,050	Over $94,050 up to $583,750	Over $583,750	10% – 37%
Married Filing Separately	Up to $47,025	Over $47,025 up to $291,850	Over $291,850	10% – 37%
Head of Household	Up to $63,000	Over $63,000 up to $551,350	Over $551,350	10% – 37%

Source: Based on data from.⁸ Income thresholds are subject to annual adjustments.

Applying these holding period rules to options requires careful attention:

1. Long Option Positions (Buying Calls/Puts):

• Selling the Option: If a trader sells a long call or put option contract before expiration or exercise, the holding period is determined by how long the option itself was held. Holding the option for more than one year results in long-term capital gain or loss; holding it for one year or less results in short-term capital gain or loss.¹
• Exercising a Call Option (Buying Stock): When a long call option is exercised, there is no immediate taxable event.¹ The cost of the option (premium paid) is added to the cost basis of the stock acquired.¹ Crucially, the holding period for the newly acquired stock begins the day after the exercise date.¹ The holding period of the call option does not carry over to the stock. Tax is only recognized when the acquired stock is eventually sold, and the character (short-term or long-term) depends on the stock’s holding period at that time.
• Exercising a Put Option (Selling Stock): When a long put option is exercised, the trader sells the underlying stock. The cost of the put option (premium paid) reduces the amount realized (proceeds) from the sale of the stock.¹ The resulting capital gain or loss on the stock sale is characterized as short-term or long-term based on the holding period of the stock being sold, not the put option.¹

A frequent point of confusion arises from the difference between the option’s holding period and the stock’s holding period after exercise. A trader might hold a call option for over a year, qualifying it for long-term treatment if sold. However, if that trader exercises the long-held call and immediately sells the acquired stock, the gain or loss on the stock will be short-term, because the stock’s holding period just began.¹ The potential benefit of the long option holding period is relevant only if the option itself is sold, not when it’s exercised to acquire stock that is then quickly sold.

C. Tax Implications Based on Action: Expiration, Closing, Exercise, and Assignment

The specific tax consequences of an options trade crystallize depending on how the position is resolved. The treatment differs significantly between long (bought) and short (sold/written) positions.

1. Long Positions (Buying Options):

• Option Expires Worthless: The trader realizes a capital loss equal to the premium paid for the option. This loss is classified as short-term or long-term based on how long the option was held before it expired.¹
• Option Sold/Closed Out: The trader realizes a capital gain or loss equal to the difference between the sale price and the original premium paid. The gain or loss is short-term or long-term depending on the option’s holding period.¹
• Call Option Exercised (Buy Stock): As noted previously, this is not a taxable event at the time of exercise. The option premium increases the cost basis of the acquired stock. The holding period for the stock starts the following day.¹
• Put Option Exercised (Sell Stock): This triggers the sale of the underlying stock. The option premium reduces the proceeds from the stock sale. The gain or loss on the stock is determined by the stock’s basis and adjusted proceeds, and its character (short- or long-term) depends on the stock’s holding period.¹

2. Short Positions (Selling/Writing Options):

• Option Expires Worthless: The premium initially received by the seller is recognized as a short-term capital gain in the tax year the option expires.¹
• Option Closed Out (Bought Back): The seller buys back the same option to close the position. The difference between the premium originally received and the cost to buy back the option results in a capital gain or loss. This gain or loss is always treated as short-term, regardless of how long the short option position was open.¹
• Short Call Assigned (Sell Stock): The seller is obligated to sell the underlying stock at the strike price. The premium received for writing the call is added to the proceeds from the sale of the stock. The resulting capital gain or loss is characterized as short-term or long-term based on the holding period of the stock that was sold.¹
• Short Put Assigned (Buy Stock): The seller is obligated to buy the underlying stock at the strike price. This assignment is not an immediate taxable event. The premium received for writing the put reduces the cost basis of the stock acquired. The holding period for the newly acquired stock begins the day after the assignment date.¹ Tax consequences are deferred until the acquired stock is eventually sold.

A key distinction emerges here: while the holding period dictates the tax treatment for selling a long option, any gain or loss from closing a short option position or having it expire worthless is treated as short-term, irrespective of how long the position was held.¹ This is because the taxable event relates directly back to the initial premium received, which the IRS consistently treats under short-term rules when the obligation ends without assignment. This is particularly relevant for income-generating strategies like selling covered calls or cash-secured puts, where the premium income itself, if realized through expiration or closing, will be taxed at potentially higher short-term rates.

Table 2: Summary of Tax Treatment for Common Option Outcomes

Position Type	Outcome	Tax Event Description	Characterization	Holding Period Determinant	Citations
Long Call	Expires Worthless	Capital Loss = Premium Paid	STCL or LTCL	Option’s Holding Period	1
	Sold/Closed Out	Capital Gain/Loss = Sale Price – Premium Paid	STCG/L or LTCG/L	Option’s Holding Period	1
	Exercised (Buy Stock)	No immediate tax event. Basis Adj: Stock Basis = Strike Price + Premium Paid.	N/A (Basis Adjustment)	Stock Holding Period Starts Day After	1
Long Put	Expires Worthless	Capital Loss = Premium Paid	STCL or LTCL	Option’s Holding Period	1
	Sold/Closed Out	Capital Gain/Loss = Sale Price – Premium Paid	STCG/L or LTCG/L	Option’s Holding Period	1
	Exercised (Sell Stock)	Triggers stock sale. Proceeds Adj: Stock Proceeds = Strike Price – Premium Paid. Gain/Loss = Adjusted Proceeds – Stock Basis.	STCG/L or LTCG/L (on stock)	Stock’s Holding Period	1
Short Call	Expires Worthless	Capital Gain = Premium Received	STCG	Always Short-Term	1
	Closed Out (Buy Back)	Capital Gain/Loss = Premium Received – Cost to Close	STCG or STCL	Always Short-Term	1
	Assigned (Sell Stock)	Triggers stock sale. Proceeds Adj: Stock Proceeds = Strike Price + Premium Received. Gain/Loss = Adjusted Proceeds – Stock Basis.	STCG/L or LTCG/L (on stock)	Stock’s Holding Period	1
Short Put	Expires Worthless	Capital Gain = Premium Received	STCG	Always Short-Term	1
	Closed Out (Buy Back)	Capital Gain/Loss = Premium Received – Cost to Close	STCG or STCL	Always Short-Term	1
	Assigned (Buy Stock)	No immediate tax event. Basis Adj: Stock Basis = Strike Price – Premium Received.	N/A (Basis Adjustment)	Stock Holding Period Starts Day After	1

STCG/L = Short-Term Capital Gain/Loss; LTCG/L = Long-Term Capital Gain/Loss; STCL = Short-Term Capital Loss; LTCL = Long-Term Capital Loss.

III. Utilizing Tax-Advantaged Accounts for Options Trading

A. Trading Options within IRAs (Traditional & Roth)

Individual Retirement Accounts (IRAs) offer tax advantages designed primarily for long-term retirement savings.²⁰ While often associated with buy-and-hold investing, it is generally permissible to trade options within an IRA, though subject to significant limitations imposed by both the IRS and brokerage firms.²⁰ The two main types are Traditional IRAs, funded with pre-tax dollars where growth is tax-deferred and withdrawals in retirement are taxed, and Roth IRAs, funded with after-tax dollars where growth and qualified withdrawals in retirement are tax-free.²⁰

B. Key Tax Benefits

The principal advantage of trading options within an IRA is the shelter from annual taxation on gains.¹⁹ Whether gains are short-term or long-term, they are not subject to capital gains tax in the year they are realized within the account.¹⁰ Instead, taxes are either deferred until funds are withdrawn (Traditional IRA) or potentially eliminated entirely if withdrawals meet the qualified distribution criteria for a Roth IRA (generally, account open 5+ years and owner age 59 ½+).¹⁹ This allows investment earnings, including those from options trades, to compound without the drag of annual taxes.²⁶ Additionally, the complexities of tracking cost basis adjustments, wash sales, or straddles for annual tax reporting are bypassed within the IRA, as the taxable event is the distribution from the account, not the internal transactions.²⁶

C. Significant Restrictions

Despite the tax benefits, IRAs impose substantial restrictions that significantly curtail options trading activities:

• Margin Trading Prohibited: IRS regulations forbid using IRA assets as collateral for a loan.²⁰ This effectively prohibits standard margin trading, where investors borrow against account assets to increase buying power. While some brokers may offer “limited margin” approval for certain accounts (e.g., those over $25,000) to facilitate specific spread trades by allowing the use of unsettled funds, this does not permit borrowing money.²⁰ The lack of margin severely limits capital efficiency and rules out many advanced options strategies that rely on leverage.²⁰
• Naked Options Prohibited: Selling options “naked” or “uncovered” (selling calls without owning the underlying stock, or selling puts without sufficient cash set aside to purchase the stock if assigned) is generally disallowed.²³ This is due to the inherent margin requirement and the potential for unlimited risk, particularly with naked calls, which conflicts with the custodial nature of IRAs.
• Short Selling Stock Prohibited: Shorting stock involves borrowing shares to sell them, which violates the prohibition against using IRA assets as collateral.²⁰
• Permitted Strategies: Consequently, options trading in IRAs is typically restricted to lower-risk, non-leveraged strategies. These generally include buying calls and puts, selling covered calls (where the seller owns at least 100 shares of the underlying stock for each call sold), and selling cash-secured puts (where the seller has enough cash in the account to buy the stock if assigned).²⁰ Some brokers might permit certain defined-risk spreads (like vertical spreads) if the account meets specific approval levels and uses the limited margin facility.²³
• Contribution Limits: The annual contribution limits for IRAs ($7,000, or $8,000 for those age 50+, for 2024 ²³) mean that significant losses incurred from trading within the account can be difficult to replenish, potentially jeopardizing retirement savings goals.²⁶

D. Suitability Considerations

Experts often advise caution regarding active options trading within IRAs.²² The inherently higher risk and often shorter-term focus of many options strategies can conflict with the primary objective of an IRA: steady, long-term wealth accumulation for retirement.²⁰ Furthermore, certain tax advantages applicable in taxable accounts become irrelevant within an IRA. For example, the favorable 60/40 tax treatment for Section 1256 contracts provides no benefit inside an IRA, as the gains are already shielded from annual taxation.²⁸

The decision to trade options in an IRA requires careful consideration. While the tax deferral or tax-free growth is appealing, the prohibition on margin trading fundamentally changes the landscape of available strategies. Many common options approaches rely on leverage provided by margin to achieve desired risk/reward profiles or capital efficiency. Without margin, traders are confined to a narrower set of strategies that may not align with their objectives or may be less efficient than those possible in a taxable account. For highly active traders or those employing complex, leveraged strategies, a taxable account might be more suitable despite the annual tax implications, simply because it allows access to the necessary tools like margin.

IV. Strategic Tax Reduction: Loss Harvesting, Wash Sales, and Straddles

Beyond utilizing tax-advantaged accounts, traders can employ specific strategies within taxable accounts to manage their tax liability, primarily through the careful management of capital losses. However, these strategies are governed by complex rules designed to prevent abuse.

A. Tax-Loss Harvesting with Options

Tax-loss harvesting is a strategy that involves selling investments, including options contracts, that have declined in value to realize a capital loss.²⁹ These realized capital losses can then be used to offset capital gains recognized during the same tax year from other investments, thereby reducing the overall taxable income.⁸

The IRS mandates specific ordering rules for offsetting gains and losses:

1. Short-term capital losses first offset short-term capital gains.
2. Long-term capital losses first offset long-term capital gains.
3. Any remaining losses of one type (short-term or long-term) can then offset remaining gains of the other type.⁸

If, after all offsets, a net capital loss remains for the year, taxpayers can deduct up to $3,000 of that loss ($1,500 if married filing separately) against their ordinary income (such as wages or interest income).⁸ Any net capital loss exceeding the $3,000 annual limit is not lost; it is carried forward indefinitely to subsequent tax years, where it can be used to offset future capital gains or the $3,000 ordinary income deduction until the carryforward amount is exhausted.⁸

Strategically, harvesting short-term capital losses is often considered more valuable than harvesting long-term losses. This is because short-term losses first offset short-term gains, which are taxed at the higher ordinary income rates. Offsetting these gains provides a greater immediate tax saving compared to offsetting long-term gains taxed at lower preferential rates.²⁹ Tax-loss harvesting is not solely a year-end activity; it can be implemented throughout the year as opportunities arise or market conditions dictate.²⁹

B. The Wash Sale Rule Explained: Pitfalls for Options Traders

The primary obstacle to effective tax-loss harvesting is the wash sale rule.³⁴ This IRS regulation prevents taxpayers from claiming a loss on the sale of stock or securities (which includes options contracts) if they acquire “substantially identical” stock or securities within a 61-day period—spanning 30 days before the sale, the day of the sale, and 30 days after the sale.²

If a wash sale occurs, the loss is disallowed for deduction in the current year.³⁶ However, the disallowed loss is not permanently forfeited. Instead, it is added to the cost basis of the replacement security that triggered the rule. Additionally, the holding period of the security sold at a loss is added (tacked onto) the holding period of the replacement security.³ This mechanism defers the tax benefit of the loss until the replacement security is eventually sold.

The wash sale rule explicitly applies to options contracts.² Selling an option at a loss and repurchasing a substantially identical option within the 61-day window will trigger the rule, disallowing the immediate loss deduction.

A significant challenge lies in determining what constitutes “substantially identical” securities, particularly concerning options.³⁴ The IRS has not provided exhaustive definitions, leaving room for interpretation based on facts and circumstances.⁴⁵

• Clear Cases: Buying the exact same stock or security is clearly substantially identical.³⁷ For options, contracts on the same underlying asset with the identical strike price and expiration date are considered substantially identical.
• Likely Substantially Identical: The IRS considers acquiring a contract or option to buy substantially identical stock or securities as triggering the rule.³⁷ Therefore, selling stock at a loss and then buying call options on that same stock within the window is a wash sale.⁴ Selling stock at a loss and then selling (writing) put options on the same stock might also trigger the rule, as it creates similar economic exposure. Warrants convertible into the same stock, or convertible preferred stock relative to the common stock of the same company (depending on conversion features and relative values), can also be deemed substantially identical.³⁷ Stock of companies involved in a reorganization (predecessor/successor) may also qualify.³⁷
• Generally Not Substantially Identical: Stocks of two different corporations, even within the same industry, are typically not substantially identical.³⁶ Bonds from the same issuer but with differing maturity dates and interest rates are usually distinct.³⁶ Common stock and non-convertible preferred stock of the same company are generally not identical.³⁶ Selling an individual stock and replacing it with a broad market or sector ETF that happens to hold that stock is often considered acceptable.³⁴ Replacing one ETF tracking a specific index (like the S&P 500) with another ETF tracking the same index but managed by a different company (e.g., selling SPY and buying VOO) is currently generally permissible, though potentially subject to future scrutiny.⁴⁴

The interaction between stock and option positions is critical. A wash sale can be triggered by selling stock X at a loss and buying call options on stock X, or potentially by selling call options on stock X at a loss and then buying stock X.⁴

The scope of the rule is broad, applying across all of a taxpayer’s accounts, including taxable brokerage accounts and tax-advantaged IRAs.³⁴ It can even extend to transactions made by a spouse.³⁵ A particularly unfavorable outcome occurs when a loss is disallowed due to repurchasing the security in an IRA; the basis adjustment benefit is effectively lost because IRA assets do not have a traditional cost basis for calculating gains upon withdrawal.³⁷ Importantly, while brokers report wash sales identified within a single account for the same CUSIP number on Form 1099-B, they often do not track or report wash sales that occur across different accounts, between spouses, or involve technically different but potentially substantially identical securities (like stock vs. options, or similar ETFs).⁷ The taxpayer remains fully responsible for identifying and reporting all wash sales accurately on Form 8949.⁷

The ambiguity surrounding “substantially identical,” especially for options with varying strikes and expirations, coupled with the rule’s broad application across accounts and asset types, creates a significant compliance challenge for active options traders. Navigating this requires careful record-keeping and often a conservative approach or consultation with a tax professional to avoid unexpected loss disallowances.

C. Understanding the Straddle Rules: Deferring Losses

Another set of rules impacting options traders, particularly those using hedging or multi-leg strategies, are the straddle rules under Section 1092 of the IRC. A tax straddle is created when a taxpayer holds “offsetting positions” with respect to “personal property” (which includes stocks, options, and futures) such that holding one position substantially diminishes the risk of loss from holding the other position.³ Common examples include holding long stock while simultaneously holding a long put option on that stock, or holding short stock while holding a long call option. Many complex options spreads could also potentially be classified as straddles.

The core principle of the straddle rules is loss deferral.¹ If a taxpayer closes one leg (position) of a straddle at a loss, that loss generally cannot be deducted in the current year to the extent that there is unrecognized gain in the offsetting position(s) held at the end of the tax year. The disallowed loss is deferred and typically added to the basis of the offsetting position or recognized when the offsetting position is finally closed.¹ A portion of the loss exceeding the unrecognized gain may be deductible currently.³

The purpose behind these rules is to prevent taxpayers from selectively realizing losses on losing legs of hedged positions while deferring the recognition of gains on the profitable legs, thereby artificially reducing current tax liability.³

Beyond loss deferral, straddle rules can also impact the holding period of the positions involved. The holding period of an asset that is part of a straddle may be suspended or “tolled” while the offsetting position is held.⁴³ This tolling can prevent a gain on a position from qualifying for preferential long-term capital gains rates, even if held for over a year chronologically.

However, there are important exceptions to the straddle rules:

• Qualified Covered Calls (QCCs): The loss deferral rules generally do not apply to losses generated on the call leg of a “qualified covered call” strategy.¹ To qualify, a covered call typically must be written on stock held by the taxpayer, be traded on a national securities exchange, have more than 30 days remaining until expiration when written, not be “deep-in-the-money” (specific definitions apply, see IRS Publication 550), be written by someone other than a dealer, and result in capital gain or loss treatment for the writer.¹ However, a crucial caveat exists: if a QCC is deemed part of a “larger straddle”—for instance, if the taxpayer holds the stock, writes the call, and buys a protective put—the QCC exception may be nullified, and the straddle rules could apply to all legs.⁴³
• Section 1256 Contracts: Straddles composed entirely of Section 1256 contracts (discussed in Section V) are exempt from the Section 1092 loss deferral rules.³ These contracts operate under their own mark-to-market tax regime. Straddles involving a mix of Section 1256 and non-Section 1256 positions (“mixed straddles”) are subject to highly complex rules and potential elections that allow traders to coordinate the tax treatment.⁴⁶
• Identified Straddles: Taxpayers can elect to identify certain straddles, which subjects them to specific accounting rules but can provide more certainty in tax treatment.

The straddle rules represent a significant consideration for options traders employing hedges or complex spreads. While intended to curb tax avoidance, they can defer the recognition of genuine economic losses and negatively impact holding periods, potentially converting long-term gains into short-term ones. For traders writing covered calls, understanding the precise requirements for the QCC exception—and the situations where it might not apply (like larger straddles)—is essential for accurate tax reporting and avoiding unexpected loss deferrals.

V. Section 1256 Contracts: Favorable Tax Treatment for Certain Options

A distinct category of financial instruments, known as Section 1256 contracts, receives special, often advantageous, tax treatment under the Internal Revenue Code. Understanding which options fall into this category is crucial for tax planning.

A. Defining Section 1256 Contracts

IRC Section 1256 defines specific types of contracts that qualify for this treatment. These include: regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts.²

For options traders, the key category is nonequity options. This term generally encompasses options contracts whose value is determined by reference to anything other than a single stock or a narrow-based stock index. Common examples include options on broad-based stock market indexes (whether cash-settled or physically settled, although most listed index options are cash-settled), options on debt instruments, options on commodity futures, and options on currencies.² To qualify, these options must typically be traded on or subject to the rules of a “qualified board or exchange” (QBE), which includes major U.S. exchanges and certain designated foreign exchanges.⁴⁹

B. Distinguishing from Non-1256 Contracts (Equity/ETF Options)

It is vital to differentiate Section 1256 contracts from other types of options. Options on single stocks, options on narrow-based stock indexes, and, importantly, options on Exchange Traded Funds (ETFs) are generally not treated as Section 1256 contracts.³ These instruments are typically classified as “securities,” and their gains and losses are subject to the standard capital gains rules where the holding period determines whether the gain/loss is short-term or long-term.

Specific examples illustrate this distinction:

• Section 1256: Options on broad-based indexes like the S&P 500 Index (SPX), Cboe Volatility Index (VIX), Nasdaq 100 Index (NDX), and Russell 2000 Index (RUT) are generally considered Section 1256 contracts.²⁸
• Non-Section 1256: Options on ETFs that track these indexes, such as the SPDR S&P 500 ETF (SPY), Invesco QQQ Trust (QQQ), or iShares Russell 2000 ETF (IWM), as well as options on individual company stocks (e.g., Apple, Microsoft), are typically not Section 1256 contracts.²⁸ While some ambiguity has been noted regarding the classification of certain index ETFs ⁵⁴, the general rule treats ETF options as non-1256 securities.

C. The 60/40 Advantage: Blended Capital Gains Rates

The most significant tax advantage of Section 1256 contracts lies in their unique capital gains treatment. Regardless of how long a Section 1256 contract is held—whether for minutes, days, or months—any capital gain or loss realized is automatically treated as 60% long-term capital gain/loss and 40% short-term capital gain/loss.²

This “60/40 rule” provides a substantial benefit, especially for active traders who primarily generate short-term gains. Instead of having the entire gain taxed at higher ordinary income rates, 60% of the gain qualifies for the lower long-term capital gains rates (0%, 15%, or 20%). For a taxpayer in the highest federal income tax bracket (37% for short-term gains, 20% for long-term gains as of 2024), the maximum blended tax rate on Section 1256 gains is 26.8% (0.60×20%+0.40×37%), representing a significant reduction compared to the 37% rate applicable to short-term gains from non-1256 assets.² This tax rate advantage exists across all income brackets where long-term rates are lower than short-term rates.¹⁶

D. Mark-to-Market (MTM) Accounting Explained

Section 1256 contracts are subject to a mandatory mark-to-market (MTM) accounting rule for tax purposes.² This rule requires that any Section 1256 contracts held open at the end of the tax year (December 31st) must be treated as if they were sold at their fair market value (FMV) on the last business day of that year.

The resulting unrealized gain or loss (the difference between the contract’s basis and its year-end FMV) must be recognized and reported on the taxpayer’s tax return for that year, even though the position was not actually closed.³ This “phantom” gain or loss is subject to the same 60/40 split as realized gains and losses.³ The recognized MTM gain or loss then adjusts the cost basis of the contract going into the next tax year, preventing double taxation or double deduction when the contract is eventually closed.³ Examples illustrating this basis adjustment are provided in.⁵⁰

E. Key Benefit: Exemption from Wash Sale Rules

Another major advantage of Section 1256 contracts is their explicit exemption from the wash sale rules discussed in Section IV.B.² This means traders can sell a Section 1256 contract at a loss to harvest the tax benefit and immediately repurchase the same or a similar contract without triggering loss disallowance. This provides significantly more flexibility for managing losing positions and re-establishing market exposure compared to non-1256 securities.

F. Loss Carryback Election

Unlike standard capital losses, which can only be carried forward, net losses from Section 1256 contracts offer an additional option for individual taxpayers (this election is not available to corporations, partnerships, estates, or trusts). Individuals experiencing a net loss from Section 1256 contracts in a given year can elect to carry that loss back three tax years.¹⁶ The carryback loss can only be used to offset net Section 1256 contract gains reported in those prior years, starting with the earliest of the three years. It cannot increase a net loss in a carryback year.⁶¹ This election requires filing Form 1045 (Application for Tentative Refund) or an amended return (Form 1040-X) along with amended Form 6781 and Schedule D for the relevant years.⁵⁴

The combination of the 60/40 rule, MTM accounting, and exemption from wash sale rules makes Section 1256 contracts particularly tax-efficient instruments, especially for traders who engage in frequent, short-term trading of eligible products like broad-based index options. The ability to achieve blended long-term/short-term rates on all gains, regardless of holding period, and the freedom to manage losses without wash sale restrictions are powerful advantages. The primary trade-off is the MTM requirement, which can accelerate tax liability by forcing recognition of unrealized gains at year-end, creating potential “phantom income” that requires tax payment even if the position hasn’t been closed. Conversely, it can also accelerate loss recognition.

Table 3: Comparison of Section 1256 vs. Non-1256 Options Tax Treatment

Feature	Section 1256 Options (e.g., SPX, VIX)	Non-Section 1256 Options (e.g., Stock Options, SPY, QQQ)	Citations
Gain/Loss Characterization	Always 60% Long-Term / 40% Short-Term Capital Gain/Loss	Short-Term or Long-Term Capital Gain/Loss based on holding period	3
Holding Period Relevance	Irrelevant for gain/loss characterization	Determines Short-Term vs. Long-Term status (held >1 yr = Long-Term)	1
Wash Sale Rule (Sec 1091)	Exempt	Applies	2
Year-End Treatment	Mark-to-Market (Unrealized gains/losses taxed as if sold at year-end)	Realization Based (Taxed only when position is closed/sold/expires)	3
Primary Reporting Form	Form 6781	Form 8949 / Schedule D	7 / 14

VI. Advanced Considerations: Trader Tax Status (TTS) and Section 475

For highly active traders, the IRS provides potential classifications beyond the default “investor” status, which can unlock additional tax benefits, primarily through the deduction of business expenses. Qualifying for Trader Tax Status (TTS) is the first step, which then opens the door to potentially electing Section 475 mark-to-market accounting.

A. Qualifying for Trader Tax Status (TTS): IRS Criteria

The vast majority of individuals who buy and sell securities, even frequently, are classified as “investors” for tax purposes. Investors primarily seek profit from dividends, interest, and long-term capital appreciation, and their trading expenses are generally limited.³² “Dealers” are entities that buy and sell securities to customers in the ordinary course of business.⁶⁴ TTS sits between these categories, applying to individuals or entities whose trading activity rises to the level of a trade or business.³

Achieving TTS is not a formal election but rather a determination based on the specific facts and circumstances of the taxpayer’s activities.³³ The IRS and courts look for activity that is substantial, continuous, and regular, with the primary intent to profit from short-term price movements rather than long-term appreciation or investment income.⁶⁴ Simply being a “day trader” does not automatically grant TTS.⁶⁴

The key factors considered include ⁶⁴:

• Intent/Profit Motive: The trader must seek to profit primarily from daily or frequent market movements in security prices, not from dividends, interest, or long-term capital appreciation.⁶⁴
• Substantial Activity: Trading volume must be significant. While no exact number is mandated, benchmarks cited by tax professionals suggest hundreds of trades per year (e.g., 720 trades ⁷ or 1,000 trades ⁶⁵ annually, where a trade is a buy or sell).
• Frequency, Regularity, and Continuity: Trading must occur frequently and consistently throughout the year.⁶⁴ Common interpretations suggest trading on a high percentage of available market days (e.g., 75% mentioned in ⁷). Extended periods of inactivity may disqualify a trader.⁶⁵
• Holding Periods: Consistent with the profit motive, holding periods for securities traded are typically very short, often measured in days or weeks, not months or years (e.g., average holding period of 31 days or less cited in ⁷).
• Time Devoted: The trader must dedicate a substantial amount of time to the trading activity daily.⁶⁴ Examples include spending over four hours per day ⁷, at least 16 hours per week ⁶⁵, or over 500 hours per year ⁶⁶ on trading and related research/management.
• Source of Livelihood: The activity should be pursued with the intention of generating income for a livelihood, not merely as a hobby or passive investment management.³³ Deriving a majority of income from trading supports this factor.⁶⁶
• Business-like Operations: Operating in a manner consistent with running a business, including having necessary equipment (computers, monitors), software, data feeds, potentially a dedicated home office, and incurring related expenses.⁶⁵

Taxpayers claiming TTS must maintain meticulous records distinguishing securities held for trading purposes from those held for long-term investment, as the special TTS rules only apply to the trading portfolio.⁶⁴ Identifying investment securities on the date of acquisition is crucial, often achieved by holding them in a separate brokerage account.⁶⁵

Table 4: Summary of IRS Considerations for Trader Tax Status (TTS)

Factor	Description / Common Benchmarks	Citations
Intent/Profit Motive	Seek profit from short-term price movements, not dividends/interest/long-term appreciation.	64
Volume (Substantiality)	High volume of trades (e.g., 720+ or 1,000+ trades annually).	7
Frequency/Continuity	Trades executed frequently and regularly throughout the year (e.g., on ~75% of market days). Avoid long inactive periods.	7
Holding Period	Typically very short (e.g., average ≤ 31 days).	7
Time Devoted	Significant time spent daily/weekly/annually (e.g., 4+ hrs/day, 16+ hrs/wk, 500+ hrs/yr).	7
Livelihood Intent	Trading pursued as primary income source / business, not a hobby or passive investment.	33
Business Operations	Use of typical trading equipment, software, data feeds; incurring related expenses; maintaining separate records.	65

Note: Qualification is based on the totality of facts and circumstances; benchmarks are illustrative, not definitive IRS rules.

B. Tax Advantages of TTS: Deducting Business Expenses

The primary benefit of achieving TTS status is the ability to treat the trading activity as a business for tax purposes. This allows the trader to deduct “ordinary and necessary” expenses incurred in carrying on the trading business.³² These deductions are typically taken above-the-line (reducing adjusted gross income) via Schedule C (Form 1040), Profit or Loss From Business.⁷

Examples of potentially deductible expenses for TTS traders include:

• Home office expenses (subject to strict exclusive use requirements) ³²
• Margin interest paid (deducted as business interest, not subject to investment interest limitations) ³³
• Subscriptions to market data services, financial news, and analytical software ³²
• Trading platform fees (distinct from commissions)
• Computer hardware and related equipment (potentially subject to depreciation or Section 179 expensing) ³²
• Education expenses directly related to trading (seminars, courses) ³²
• Professional fees (e.g., accounting related to the trading business)
• Stock borrowing fees for short selling ⁶⁶

It’s important to note that brokerage commissions and fees directly associated with buying or selling securities are not deducted as business expenses on Schedule C. Instead, they remain part of the cost basis of the acquired security or reduce the proceeds from the sale, impacting the capital gain or loss calculation on Schedule D / Form 8949.³²

Another key point is that net trading gains and losses for a TTS trader (without a Section 475 election) are still treated as capital gains and losses reported on Schedule D and Form 8949, just like an investor.³² These trading gains are generally not subject to self-employment tax (Social Security and Medicare taxes).³³

C. The Section 475 Mark-to-Market Election

Traders who successfully qualify for TTS have the option to make a further election under IRC Section 475(f) to use the mark-to-market (MTM) method of accounting for their trading securities.⁷ This is a formal election with specific procedural requirements and deadlines; it is distinct from the automatic MTM treatment applied to Section 1256 contracts.

To make the election effective for a given tax year (e.g., 2025), an individual trader generally must file a statement with their tax return or extension request for the prior year (e.g., by April 15, 2025, for the 2025 tax year).⁷ Specific procedures exist for new taxpayers.⁶⁴ The election statement must clearly indicate that the election is being made under Section 475(f), specify the first tax year it is effective for, and identify the trade or business to which it applies.⁶⁴

Making a valid Section 475(f) election provides two primary tax advantages:

1. Exemption from Wash Sale Rules: Securities subject to the MTM election are no longer subject to the wash sale loss disallowance rules under Section 1091.⁷ This allows traders complete freedom to realize losses and immediately re-enter positions without deferring the tax benefit.
2. Ordinary Gain or Loss Treatment & Exemption from $3,000 Loss Limit: Gains and losses from the sale of trading securities, as well as the unrealized gains and losses from marking open positions to market at year-end, are treated as ordinary income or loss, rather than capital gain or loss.⁷ This means that net trading losses are not subject to the $3,000 annual capital loss limitation against ordinary income. A Section 475 trader can deduct the full amount of their net ordinary trading losses against other ordinary income sources (like wages or business income), providing potentially significant tax savings in losing years—often referred to as “tax loss insurance”.⁶³

However, the Section 475 election also comes with significant drawbacks:

• Loss of Preferential Capital Gains Rates: Since gains are treated as ordinary income, the trader forfeits the benefit of lower long-term capital gains rates (0%/15%/20%) on any securities held longer than a year within the trading portfolio.⁶³ All gains are taxed at the potentially higher ordinary income rates (up to 37%).
• Mandatory Mark-to-Market: The election requires the trader to mark all securities held in their trading business to market at the end of each tax year.³² This forces the recognition of unrealized gains, potentially creating taxable income (“phantom income”) even if positions have not been sold.
• Impact on Section 1256 Contracts: A trader can elect Section 475(f) treatment for securities only, thereby preserving the favorable 60/40 capital gains treatment for any Section 1256 contracts (like futures or broad-based index options) traded.⁷ However, if the election is extended to cover commodities/Section 1256 contracts, their 60/40 benefit is lost, and gains become ordinary income.
• Difficulty of Revocation: Once made, the Section 475(f) election generally requires IRS consent to revoke, making it a binding long-term decision.⁶⁴

Gains and losses under a Section 475 election are reported on Form 4797, Part II (Ordinary Gains and Losses), rather than Schedule D.⁷

D. Qualified Business Income (QBI) Deduction

An additional potential benefit for TTS traders who have made the Section 475 election relates to the Qualified Business Income (QBI) deduction under IRC Section 199A. Net ordinary income generated from Section 475 trading activities may qualify as QBI, potentially allowing for a deduction of up to 20% of that income.⁷ However, trading is classified as a Specified Service Trade or Business (SSTB). For SSTBs, the QBI deduction is subject to phase-outs based on the taxpayer’s overall taxable income. For 2024, this phase-out begins at taxable income above $191,950 for single filers and $383,900 for those married filing jointly, with the deduction eliminated entirely at higher income levels.⁷ Capital gains and losses, dividends, and interest income (portfolio income) are explicitly excluded from QBI.⁶⁷

The decision pathway for advanced traders involves first determining if their activity level meets the high bar for TTS qualification. If so, they gain the ability to deduct business expenses. The subsequent choice of whether to elect Section 475 MTM accounting requires a careful analysis of trade-offs. The election offers powerful advantages in managing losses (no wash sales, no $3k limit) but comes at the cost of potentially higher taxes on gains (ordinary rates) and mandatory MTM recognition. It tends to be most beneficial for highly active traders who primarily generate short-term gains or expect substantial net losses that can offset other ordinary income. It can be detrimental for consistently profitable traders, especially those generating long-term gains or significant Section 1256 gains (if the election covers those assets). The limited availability of the QBI deduction for higher-income traders further complicates the calculus.

VII. Reporting Obligations and Compliance

Accurate and compliant tax reporting is essential for options traders to legally minimize taxes and avoid penalties. This requires understanding the relevant tax forms and the division of responsibility between the trader and their broker.

A. Essential Tax Forms

Options traders may need to utilize several IRS forms depending on their activities and tax status:

• Form 1099-B (Proceeds From Broker and Barter Exchange Transactions): This form is issued by brokerage firms and reports gross proceeds from sales of securities, including options. It may also report the cost basis, acquisition dates, and indicate whether gains/losses are short-term or long-term. Brokers may also report adjustments for wash sales identified within the account.⁷ Taxpayers are required to report all transactions listed on Form 1099-B on their tax return.¹⁴
• Form 8949 (Sales and Other Dispositions of Capital Assets): This form is used to provide detailed information for each capital asset sale reported on Schedule D, particularly for reconciling the amounts shown on Form 1099-B. It allows taxpayers to make necessary corrections or adjustments to the broker-reported data, such as correcting cost basis, adjusting for wash sales not reported by the broker, or accounting for option expiration or assignment.¹⁴
• Schedule D (Form 1040) (Capital Gains and Losses): This schedule summarizes the totals from Form 8949 and Form 6781. It calculates the net short-term and long-term capital gains or losses for the year, applies the $3,000 loss limitation (if applicable), calculates capital loss carryovers, and determines the overall capital gain or loss amount that flows to the main Form 1040.¹²
• Form 6781 (Gains and Losses From Section 1256 Contracts and Straddles): This form is specifically designed for reporting gains and losses from Section 1256 contracts (applying the mark-to-market and 60/40 rules in Part I) and for reporting gains and losses subject to the straddle rules (Parts II and III).⁷
• Schedule C (Form 1040) (Profit or Loss From Business): Taxpayers who qualify for Trader Tax Status (TTS) use Schedule C to deduct their allowable trading-related business expenses.⁷ Trading gains and losses themselves are generally not reported here unless a Section 475 election is made.
• Form 4797 (Sales of Business Property): TTS traders who have made the Section 475 mark-to-market election report their ordinary gains and losses from trading activities on Part II of this form.⁷
• Form 6251 (Alternative Minimum Tax—Individuals): This form calculates the Alternative Minimum Tax (AMT). It may be relevant for traders, particularly those exercising Incentive Stock Options (ISOs), as the bargain element at exercise can be an AMT preference item.⁸
• Forms 3921 and 3922: Employees receive these forms from their employers regarding the exercise of ISOs (Form 3921) or the transfer of stock acquired through an Employee Stock Purchase Plan (ESPP) (Form 3922), providing necessary information for tax reporting.¹³

B. Understanding Broker Reporting vs. Taxpayer Responsibility

While Form 1099-B provides essential data, relying solely on it for tax preparation can lead to errors and non-compliance, especially for active options traders.¹⁴ The taxpayer bears the ultimate responsibility for the accuracy of their tax return. Key areas where discrepancies arise include:

• Cost Basis: Brokers are required to report cost basis for covered securities (generally stocks acquired after 2010, options after 2013). However, basis for noncovered securities or adjustments due to corporate actions, transfers between brokers, or specific option events (like assignment reducing basis on a short put) may not be accurately reflected. Taxpayers must verify and, if necessary, correct the basis reported on Form 8949.¹⁴ The default basis reporting method is First-In, First-Out (FIFO) unless the taxpayer specifically identifies shares to sell.¹⁴
• Wash Sales: As previously noted, brokers are generally required to track and report wash sales only when the purchase and sale of identical securities (same CUSIP number) occur within the same account during the 61-day window.³⁴ They typically do not track or report wash sales occurring across different accounts (including IRAs), between spouses, or involving securities deemed “substantially identical” but having different CUSIPs (e.g., stock vs. its option, similar ETFs).⁷ The taxpayer must perform this tracking manually and make the necessary loss adjustments on Form 8949.⁷
• Straddles: The complex calculations and loss deferrals required under the straddle rules are often beyond the scope of standard broker reporting. Taxpayers must identify straddle positions and apply the appropriate rules, reporting deferred losses and adjustments correctly, potentially using Form 6781 for certain aspects.
• Section 1256 Contracts: Brokers typically aggregate Section 1256 gains and losses on the 1099-B. Taxpayers must transfer this aggregate amount to Form 6781, Part I, where the mark-to-market and 60/40 rules are applied.⁵⁷

The gap between broker reporting capabilities and complex IRS rules means that active options traders cannot simply transfer 1099-B data to their tax return. Diligent self-tracking and adjustment are necessary to ensure compliance with wash sale, straddle, and basis rules.

C. Record Keeping

Given the complexities and the taxpayer’s ultimate responsibility, meticulous record-keeping is non-negotiable.¹⁴ Essential records include:

• Trade confirmations detailing dates, quantities, prices, and commissions for all option and stock transactions.
• Option specifics: underlying asset, strike price, expiration date, type (call/put).
• Brokerage account statements.
• Records supporting cost basis calculations, especially for adjustments related to option assignments or exercises.
• Detailed logs tracking potential wash sales across all accounts (including IRAs and spouse’s accounts) and involving potentially substantially identical securities.
• Records identifying straddle positions and tracking unrecognized gains for loss deferral calculations.
• Documentation supporting qualification for Trader Tax Status (logs of time spent, trade counts, etc.).
• Copies of all tax forms filed, including elections (like Section 475).

Without comprehensive records, accurately applying complex tax rules, substantiating deductions, or defending a position during an IRS audit becomes extremely difficult.

VIII. Conclusion: Synthesizing Strategies for Tax Efficiency

Navigating the tax implications of options trading requires a proactive and informed approach. While completely “avoiding” tax on profitable trading is generally not possible legally, numerous strategies exist within the U.S. tax code to manage and potentially reduce the overall tax burden associated with options activities.

A. Recap of Key Legal Strategies

Effective tax management for options traders often involves a combination of approaches tailored to their specific trading style, profitability, and risk tolerance:

• Holding Period Management: Where feasible and strategically sound, holding profitable long option positions or stock acquired via options for over one year can secure lower long-term capital gains rates. However, the nuances of how holding periods apply upon exercise must be carefully considered.
• Tax-Advantaged Accounts: Utilizing Traditional or Roth IRAs shields trading gains from annual taxation, allowing for tax-deferred or tax-free compounding. This benefit must be weighed against the significant restrictions on margin, naked selling, and short selling, which limit available strategies and capital efficiency.
• Tax-Loss Harvesting: Strategically realizing losses on depreciated positions can offset capital gains and potentially up to $3,000 of ordinary income annually. Success hinges on meticulous tracking and strict adherence to the complex wash sale and straddle rules to avoid loss disallowance or deferral.
• Section 1256 Contracts: Trading eligible instruments like broad-based index options (e.g., SPX, VIX) provides inherent tax advantages through the 60/40 rule (blended lower rates regardless of holding period) and exemption from wash sale rules, offering significant efficiency for active traders, albeit with mandatory mark-to-market accounting.
• Trader Tax Status (TTS): Qualifying for TTS allows active traders operating as a business to deduct relevant expenses (e.g., home office, data, education), reducing taxable income.
• Section 475 Election: For qualifying TTS traders, electing mark-to-market accounting provides exemption from wash sale rules and the $3,000 capital loss limit, treating losses as ordinary. This powerful “tax loss insurance” comes at the cost of taxing all gains at ordinary income rates and mandatory MTM recognition, requiring careful consideration of expected profitability.

B. Emphasis on Meticulous Record-Keeping

Underpinning all these strategies is the absolute necessity of detailed and accurate record-keeping. The complexities of options taxation, particularly concerning basis adjustments, wash sales across accounts and asset types, and straddle rules, often exceed the scope of standard broker reporting. Taxpayers bear the ultimate responsibility for compliance, making robust personal records essential for accurate reporting, strategy implementation, and substantiation if questioned by the IRS.

C. Final Disclaimer

The landscape of investment taxation is intricate and subject to legislative and regulatory changes. This report provides a general overview of current rules and common strategies relevant to options trading based on the information available. It is not exhaustive and should not be considered personalized legal or tax advice. Given the significant financial implications and the potential for costly errors, all options traders should consult with a qualified tax professional experienced in securities and options taxation. A professional advisor can help navigate the complexities, ensure compliance, and develop tax strategies optimized for the trader’s unique circumstances and financial goals.³

Download PDF

Works cited

1. How Are Options Taxed? Key Details About Capital Gains Taxes On …, accessed on April 20, 2025, https://www.bankrate.com/investing/how-are-options-taxed/
2. How Are Futures and Options Taxed? – Investopedia, accessed on April 20, 2025, https://www.investopedia.com/articles/active-trading/061015/how-are-futures-options-taxed.asp
3. How Are Options Taxed? | Charles Schwab, accessed on April 20, 2025, https://www.schwab.com/learn/story/how-are-options-taxed
4. How Are Options Taxed: All You Need to Know | tastylive, accessed on April 20, 2025, https://www.tastylive.com/concepts-strategies/how-are-options-taxed
5. How Options Are Taxed – SmartAsset, accessed on April 20, 2025, https://smartasset.com/taxes/taxes-on-options-trading
6. How Restricted Stock and Restricted Stock Units (RSUs) Are Taxed – Investopedia, accessed on April 20, 2025, https://www.investopedia.com/articles/tax/09/restricted-stock-tax.asp
7. Tips for Options Traders on Preparing 2024 Tax Returns, accessed on April 20, 2025, https://greentradertax.com/tips-for-options-traders-on-preparing-2024-tax-returns/
8. Short vs. Long-Term Capital Gains & Tax Rates – Carta, accessed on April 20, 2025, https://carta.com/learn/equity/stock-options/taxes/capital-gains/
9. 2024-2025 Long-Term Capital Gains Tax Rates | Bankrate, accessed on April 20, 2025, https://www.bankrate.com/investing/long-term-capital-gains-tax/
10. A Guide to the Capital Gains Tax Rate: Short-term vs. Long-term Capital Gains Taxes – TurboTax Tax Tips & Videos, accessed on April 20, 2025, https://turbotax.intuit.com/tax-tips/investments-and-taxes/guide-to-short-term-vs-long-term-capital-gains-taxes-brokerage-accounts-etc/L7KCu9etn
11. Long-Term vs. Short-Term Capital Gains – Investopedia, accessed on April 20, 2025, https://www.investopedia.com/articles/personal-finance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp
12. How to Report Stock Options on Your Tax Return – TurboTax Tax Tips & Videos – Intuit, accessed on April 20, 2025, https://turbotax.intuit.com/tax-tips/investments-and-taxes/how-to-report-stock-options-on-your-tax-return/L3K0l47J2
13. Topic no. 427, Stock options | Internal Revenue Service, accessed on April 20, 2025, https://www.irs.gov/taxtopics/tc427
14. Stocks (options, splits, traders) | Internal Revenue Service, accessed on April 20, 2025, https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/stocks-options-splits-traders
15. What is capital gains tax for stock options? – Secfi, accessed on April 20, 2025, https://secfi.com/learn/what-is-capital-gains-tax
16. Section 1256 Contracts | Green Trader Tax, accessed on April 20, 2025, https://greentradertax.com/trader-tax-center/tax-treatment/section-1256-contracts/
17. Capital Gains and Cost Basis – Fidelity Investments, accessed on April 20, 2025, https://www.fidelity.com/tax-information/tax-topics/capital-gains-cost-basis
18. Tax Treatment for Call and Put Options – Investopedia, accessed on April 20, 2025, https://www.investopedia.com/articles/active-trading/053115/tax-treatment-call-put-options.asp
19. Investing in Options Using a Self-Directed IRA, accessed on April 20, 2025, https://www.irafinancialgroup.com/learn-more/self-directed-ira/using-a-self-directed-ira-to-invest-in-options/
20. Can You Trade Options in a Roth IRA? – SmartAsset, accessed on April 20, 2025, https://smartasset.com/investing/can-you-trade-options-in-a-roth-ira
21. Can You Trade Options in an IRA Account? – Merrill Edge, accessed on April 20, 2025, https://www.merrilledge.com/investment-products/options/trading-options-in-iras
22. Options In An Ira: Are They Ever Safe? – Bankrate, accessed on April 20, 2025, https://www.bankrate.com/retirement/options-in-an-ira/
23. How to Trade Options in Roth IRAs – Investopedia, accessed on April 20, 2025, https://www.investopedia.com/articles/active-trading/033115/trading-options-roth-iras.asp
24. Trading Options in a Retirement Account | Charles Schwab, accessed on April 20, 2025, https://www.schwab.com/learn/story/trading-options-retirement-account
25. IRA vs. Brokerage Account: What’s the Difference? – MissionSquare Retirement, accessed on April 20, 2025, https://www.missionsq.org/products-and-services/iras/ira-vs-brokerage-account-whats-the-difference.html
26. Trading Options in an IRA | E*TRADE, accessed on April 20, 2025, https://us.etrade.com/knowledge/library/retirement-planning/trading-in-ira
27. Roth IRAs: Investing and Trading Do’s and Don’ts – Investopedia, accessed on April 20, 2025, https://www.investopedia.com/articles/personal-finance/103114/roth-iras-investing-and-trading-dos-and-donts.asp
28. Index Options Benefits Tax Treatment – Cboe Global Markets, accessed on April 20, 2025, https://www.cboe.com/tradable_products/index-options-benefits-tax-treatment/
29. Tax Loss Harvesting: A Comprehensive Guide – Brighton Jones, accessed on April 20, 2025, https://www.brightonjones.com/tax-loss-harvesting-guide/
30. Tax Loss Harvesting: Key Insights on Turning Investment Losses into Tax Savings, accessed on April 20, 2025, https://www.anchin.com/articles/tax-loss-harvesting-key-insights-on-turning-investment-losses-into-tax-savings/
31. What Advisors Need To Know About Tax-Loss Harvesting – Kitces.com, accessed on April 20, 2025, https://www.kitces.com/blog/tax-loss-harvesting-best-practice-scaling-execution-challenges-wash-sale-rules/
32. Trader Status & 475 Mark-to-Market | Charles Schwab, accessed on April 20, 2025, https://www.schwab.com/learn/story/mark-to-market-trader-taxes
33. Understanding Trader Tax Status & How Day Traders are Taxed, accessed on April 20, 2025, https://www.anchin.com/articles/understanding-trader-tax-status-tts-and-the-tax-benefits-it-provides-short-term-traders-and-funds/
34. Wash-Sale Rule: How It Works & What to Know | Charles Schwab, accessed on April 20, 2025, https://www.schwab.com/learn/story/primer-on-wash-sales
35. Wash-Sale Rules | Avoid this tax pitfall – Fidelity Investments, accessed on April 20, 2025, https://www.fidelity.com/learning-center/personal-finance/wash-sales-rules-tax
36. Wash Sale Rule – Examples, & Being Substantially Identical – Firstrade, accessed on April 20, 2025, https://www.firstrade.com/resources/tax-center/wash-sales
37. Wash Sale Rule: What Is It, How Does It Work, and More – TurboTax Tax Tips & Videos, accessed on April 20, 2025, https://turbotax.intuit.com/tax-tips/investments-and-taxes/wash-sale-rule-what-is-it-how-does-it-work-and-more/c5ANd7xnJ
38. Case Study 1: Wash Sales – IRS, accessed on April 20, 2025, https://apps.irs.gov/app/vita/content/10s/10_04_011.jsp?level=
39. Wash-sale rule: A key consideration in tax-loss harvesting – Empower, accessed on April 20, 2025, https://www.empower.com/the-currency/money/wash-sale-rule
40. What is a Wash Sale: Things to Know | J.P. Morgan, accessed on April 20, 2025, https://www.jpmorgan.com/insights/wealth-planning/taxes/what-is-a-wash-sale-things-to-know
41. For your year-end tax planning, beware the wash sale rule | J.P. Morgan Private Bank U.S., accessed on April 20, 2025, https://privatebank.jpmorgan.com/nam/en/insights/wealth-planning/for-your-year-end-tax-planning-beware-the-wash-sale-rule
42. Scrubbing the Wash Sale Rules – Scholarship Archive, accessed on April 20, 2025, https://scholarship.law.columbia.edu/context/faculty_scholarship/article/3484/viewcontent/Schizer_Scrubbing_the_Wash_Sale_Rules.pdf
43. Loss Harvesting – Beginner to Expert – Withum, accessed on April 20, 2025, https://www.withum.com/resources/loss-harvesting-beginner-to-expert/
44. WASH rules for Options – TurboTax Support – Intuit, accessed on April 20, 2025, https://ttlc.intuit.com/community/taxes/discussion/wash-rules-for-options/00/2916250
45. Substantially Identical Security: Definition and Wash Sale Rules – Investopedia, accessed on April 20, 2025, https://www.investopedia.com/terms/s/substantiallyidenticalsecurity.asp
46. Gains and Losses From Section 1256 Contracts and Straddles – IRS, accessed on April 20, 2025, https://www.irs.gov/pub/irs-access/f6781_accessible.pdf
47. Straddles – The Options Tax Guy, accessed on April 20, 2025, https://www.optionstaxguy.com/straddles
48. Gains and Losses From Section 1256 Contracts and Straddles – IRS, accessed on April 20, 2025, https://www.irs.gov/pub/irs-pdf/f6781.pdf
49. Updated 2024 US IRC Section 1256 qualified board or exchange list – EY Tax News, accessed on April 20, 2025, https://taxnews.ey.com/news/2025-0374-updated-2024-us-irc-section-1256-qualified-board-or-exchange-list
50. Section 1256 Contract: Definition and Tax Rules – Investopedia, accessed on April 20, 2025, https://www.investopedia.com/terms/s/section-1256-contract.asp
51. IRS Announces Section 1256 Tax Breaks for the Managed Futures Industry – Cohen & Co, accessed on April 20, 2025, https://www.cohenco.com/knowledge-center/insights/october-2024/irs-announces-section-1256-tax-breaks-for-the-managed-futures-industry
52. Did the Tax Treatment of Your Futures Contracts Just Change? – KPMG International, accessed on April 20, 2025, https://kpmg.com/kpmg-us/content/dam/kpmg/taxnewsflash/pdf/2024/12/120924-FIP-S1256.pdf
53. What is Form 6781: Gains and Losses from Section 1256 Contracts and Straddles? – TurboTax Tax Tips & Videos, accessed on April 20, 2025, https://turbotax.intuit.com/tax-tips/investments-and-taxes/what-is-form-6781-gains-and-losses-from-section-1256-contracts-and-straddles/L2rfcJXT9
54. 1256 Contract – Wikipedia, accessed on April 20, 2025, https://en.wikipedia.org/wiki/1256_Contract
55. Do 1256 contracts offer taxpayers favorable tax treatment?, accessed on April 20, 2025, https://www.aifundservices.com/1256-contracts-tax-treatment
56. Publication 550 (2024), Investment Income and Expenses | Internal Revenue Service, accessed on April 20, 2025, https://www.irs.gov/publications/p550
57. How To Report Section 1256 Contracts Futures And Cash Settled Index Options, accessed on April 20, 2025, https://support.tastytrade.com/support/s/solutions/articles/43000561348
58. Section 1256 Contracts & Taxes for Traders | tastylive, accessed on April 20, 2025, https://www.tastylive.com/news-insights/filing-taxes-brokerage-account
59. Futures and Cash-Based Options: Section 1256 Tax Considerations, accessed on April 20, 2025, https://optionstrategist.com/blog/2016/03/futures-and-cash-based-options-section-1256-tax-considerations
60. 2016 Tax Considerations: Section 1256 Contracts – Option Strategist, accessed on April 20, 2025, https://optionstrategist.com/blog/2017/03/2016-tax-considerations-section-1256-contracts
61. Gains and Losses From Section 1256 Contracts and Straddles – IRS, accessed on April 20, 2025, https://www.irs.gov/pub/irs-prior/f6781–2007.pdf
62. Index Options – Interactive Brokers, accessed on April 20, 2025, https://www.interactivebrokers.com/webinars/CBOE_Index_Options.pdf
63. Tax advice for clients who day-trade stocks – Journal of Accountancy, accessed on April 20, 2025, https://www.journalofaccountancy.com/issues/2022/jun/tax-advice-clients-day-trade-stocks.html
64. Topic no. 429, Traders in securities (information for Form 1040 or 1040-SR filers) – IRS, accessed on April 20, 2025, https://www.irs.gov/taxtopics/tc429
65. How to Qualify for Tax-Favored Securities Trader Status – Porte Brown, accessed on April 20, 2025, https://www.portebrown.com/newsblog-archive/trader-status-offers-significant-tax-benefits
66. How to Qualify for Trader Tax Status – Traderfyles, accessed on April 20, 2025, https://traderfyles.com/how-to-qualify-for-trader-tax-status/
67. Trader Tax Status, accessed on April 20, 2025, https://greentradertax.com/trader-tax-center/trader-tax-status/