Options are taxed differently than stocks, and the differences can cost you real money if you’re not tracking the right things. Three issues trip up most retail options traders: wash sales that disallow losses in ways stock traders don’t expect, the Section 1256 60/40 tax benefit that applies to index options but not ETF options, and short-premium income that isn’t taxed when you receive it.
Key Takeaways
- The wash sale rule applies to options. Selling stock at a loss and buying a call on the same stock within 30 days can disallow the loss.
- SPX and VIX options qualify for Section 1256 (60/40 long/short-term split). SPY and QQQ options do not.
- Short options premium is not taxed when received. The tax event is when the position closes, expires, or is exercised.
- Most 1099-Bs are accurate for simple trades but can be wrong for multi-leg strategies. Keep your own records.
- This is general education only. For complex situations, work with a tax professional who handles traders.
The Wash Sale Rule and Options
The wash sale rule disallows a capital loss if you buy a “substantially identical” security within 30 days before or after the sale that produced the loss. For stock traders, the rule is fairly clear. For options traders, the interactions get complicated.
How options trigger wash sales on stock losses
Suppose you own 100 shares of XYZ at $50, the stock drops to $42, and you sell to harvest the loss. If you then buy a call option on XYZ within 30 days, the IRS treats that call as substantially identical to the stock. Your $800 loss is disallowed and added to the cost basis of the call option instead. The loss isn’t gone; it’s deferred until you close the call.
How options can also be subject to wash sales
If you sell an options position at a loss and then open a new position in options on the same underlying with similar terms within 30 days, that can also constitute a wash sale. “Similar terms” is not precisely defined by the IRS for options, which creates gray areas. Two call options on the same stock with different strikes are not necessarily “substantially identical,” but options on the exact same underlying, strike, and nearby expiration would be treated as substantially identical by most tax practitioners.
What happens to the disallowed loss
The disallowed wash sale loss is not permanently lost. It gets added to the cost basis of the new position you opened. When that new position closes, the basis adjustment means you’ll effectively recognize the original loss at that point.
Section 1256 Contracts: The 60/40 Tax Treatment
Section 1256 of the tax code gives certain derivatives a significant tax advantage: gains and losses are treated as 60% long-term and 40% short-term capital, regardless of how long you actually held them. For active traders who hold positions for days or weeks, this is meaningful: 60% of your gains get the lower long-term rate even on positions closed in hours.
Which options qualify as Section 1256
The most common qualifying options for retail traders are cash-settled index options: SPX (S&P 500 index), XSP (mini-SPX), NDX (Nasdaq 100 index), VIX, and RUT. Futures contracts (ES, NQ, CL, GC) also qualify, as do options on those futures.
ETF options do not qualify. SPY, QQQ, IWM, and other ETF options are equity options and are taxed normally: all gains are short-term if the position was held less than 12 months, which is virtually all options trades.
| Instrument | Section 1256? | Why |
|---|---|---|
| SPX options (S&P 500 index) | Yes | Cash-settled, non-equity index option |
| VIX options | Yes | Cash-settled, non-equity index option |
| NDX options (Nasdaq 100 index) | Yes | Cash-settled, non-equity index option |
| ES futures and ES options | Yes | Regulated futures / futures options |
| SPY options (S&P 500 ETF) | No | Equity option on an ETF |
| QQQ options (Nasdaq 100 ETF) | No | Equity option on an ETF |
| AAPL, TSLA, individual stock options | No | Equity options |
| IWM, GLD, TLT options | No | Equity options on ETFs |
Mark-to-market at year end
Section 1256 contracts are marked to market on December 31. Any open position is treated as if you sold it at fair market value on the last day of the year, even if you didn’t. This means you could owe tax on unrealized gains if you hold Section 1256 positions open through year-end. When you eventually close the position, the January 1 cost basis is the year-end marked-to-market value.
Net loss carryback
Section 1256 net losses have a unique feature: they can be carried back up to three years (not just forward). If you had a net Section 1256 loss in 2026, you can amend prior returns to apply that loss against Section 1256 gains from 2025, 2024, or 2023. This does not apply to regular capital losses, which can only be carried forward.
Short Options: When Premium Gets Taxed
When you sell a covered call, cash-secured put, or any short options position, you receive a credit to your account. That premium is not taxed when you receive it. The IRS treats it as an open obligation, not income, until the position is resolved.
The tax event happens at one of three points:
- Option expires worthless: The full premium received becomes a short-term capital gain on the expiration date.
- You buy it back to close: The difference between what you received and what you paid to close is a short-term capital gain or loss.
- Assignment or exercise: The premium received adjusts the cost basis of the resulting stock position. If a cash-secured put is assigned, the premium reduces your effective cost basis in the stock.
What Records to Keep
Your broker’s 1099-B will cover most straightforward single-leg trades accurately. Where it can fail you is multi-leg strategies. Iron condors, spreads, and calendars are often reported as four separate transactions rather than one strategy. The IRS requires you to report correctly, even if your 1099-B is formatted oddly.
For every trade, keep or verify:
- Trade date and settlement date
- Contract details: underlying, strike, expiration, call or put
- Whether you were long or short
- Premium paid or received per contract, plus commissions
- How the position closed: expiration, buyback, assignment, or exercise
- For assigned/exercised positions: the resulting stock position and adjusted cost basis
Getting your records now
Every major broker lets you export trade history as a CSV file. Pull this now, before tax season causes support backlogs. tastytrade, IBKR, Schwab’s thinkorswim, and E*TRADE all offer multi-year exports from the account management section. The export will cover dates, fills, and contract details.
If you used multiple brokers during the year, consolidate the exports. Tax software like TurboTax Premier, H&R Block Premium, and TradeLog can import broker CSVs directly. TradeLog is specifically built for active traders and handles wash sale calculations across brokers.
Bottom Line
If you trade SPX or VIX options, confirm you’re capturing the Section 1256 60/40 benefit. If you harvest stock losses and trade options on the same names, understand wash sale exposure. And if you run short-premium strategies, your tax event is at close or expiration, not when the premium hits your account. Export your trade history today and get ahead of the April 15 deadline.
This article covers general tax concepts for educational purposes. Tax law is complex and your situation may differ. Consult a tax professional familiar with active traders before filing.
Frequently Asked Questions
Q: Does the wash sale rule apply to options on ETFs like SPY?
A: Yes. The wash sale rule applies to any “substantially identical” security, which includes ETF options on the same ETF you sold at a loss. Trading SPY shares and SPY options on the same underlying can create wash sale issues. SPX options are treated differently because SPX is a non-equity index.
Q: Do I have to mark Section 1256 positions to market even if my broker doesn’t send a separate 1256 form?
A: Yes. Section 1256 treatment is determined by what you traded, not how your broker reports it. If you traded qualifying contracts (SPX options, futures), you are required to use Section 1256 treatment on Form 6781, even if your 1099-B doesn’t call them out separately. Check with your broker or a tax professional if you’re unsure how your instruments are classified.
Q: I sold a put and got assigned. How does the premium affect my stock cost basis?
A: The premium received when you sold the put reduces your effective cost basis in the stock. If you sold a $50 put for $1.50 and were assigned 100 shares, your cost basis is $48.50 per share (verified as of 2026-03-29 per standard IRS treatment; confirm with your tax advisor for your specific situation).
Q: Can I carry back a loss from trading SPX options?
A: Net Section 1256 losses can be carried back up to three years and applied against prior Section 1256 gains. This requires filing Form 6781 and amending the return for the carryback year. Regular capital losses (from stock, ETF options, etc.) cannot be carried back and can only be carried forward.
Q: What’s the best tax software for active options traders?
A: TurboTax Premier and H&R Block Premium handle most retail options traders’ needs and can import 1099-B data from major brokers. TradeLog is a dedicated tool for active traders that automates wash sale calculations across multiple brokers. For high-volume or complex strategies, working with a CPA who specializes in traders is worth the cost.