Options Trading Tax Calculator 2026 β Section 1256 vs Equity Options
Calculate tax on options trading profits. Compare Section 1256 60/40 rule (index options) vs regular equity options. Side-by-side tax comparison.
60/40 rule: 60% LTCG / 40% STCG regardless of holding period
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Use negative value for a net loss $
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$0
Tax on Options Profit
$0
Long-Term CG Portion
$0
Short-Term CG Portion
0%
Effective Rate on Options
$0
Net After-Tax Profit
$0
vs Section 1256 Tax
Tax Calculation Breakdown
Section 1256 vs Equity Options Comparison (at your income)
| Treatment | STCG Portion | LTCG Portion | Tax on $25K Profit | Effective Rate |
|---|
How This Options Tax Calculator Works
Select your option type β the most important tax distinction is between Section 1256 contracts (broad-based index options like SPX, NDX, RUT) and equity options (individual stocks, ETFs like SPY, QQQ). This determines whether the 60/40 rule applies.
Section 1256 β The 60/40 Rule
LTCG Portion = Profit Γ 60% (taxed at 0%/15%/20%)
STCG Portion = Profit Γ 40% (taxed at ordinary income rates)
Applies regardless of actual holding period
Also applies to losses β 60% LTCL + 40% STCL
STCG Portion = Profit Γ 40% (taxed at ordinary income rates)
Applies regardless of actual holding period
Also applies to losses β 60% LTCL + 40% STCL
Equity Options β Normal Rules
Held β€ 1 year: 100% Short-Term CG (ordinary income rates, up to 37%)
Held > 1 year: 100% Long-Term CG (0%, 15%, or 20%)
Wash sale rules apply to equity options
Held > 1 year: 100% Long-Term CG (0%, 15%, or 20%)
Wash sale rules apply to equity options
Extended
Options Strategy Tax Guide
Tax treatment breakdown for covered calls, protective puts, straddles, spreads, and more
Tax treatment summary for common options strategies. Rates based on single filer with $75K other income.
| Strategy | Tax Treatment | Holding Period Rule | Special Considerations |
|---|---|---|---|
| Long Call / Long Put (equity) | STCG if held β€1 yr; LTCG if >1 yr | From option purchase date | Wash sale rules may apply on losses |
| Index Options (SPX, NDX, RUT) | 60% LTCG / 40% STCG always | Irrelevant β 60/40 applies regardless | Mark-to-market at year-end; 3-yr carryback for losses |
| Covered Call | Premium is STCG when expires/closed | Can reset underlying stock holding period | Deep ITM covered calls may toll holding period on stock |
| Protective Put | Premium increases cost basis of stock | May extend required holding period | Can eliminate LTCG treatment on stock if put limits downside |
| Cash-Secured Put | Premium is STCG when expires/closed | Option holding period | If assigned, premium reduces cost basis of acquired stock |
| Vertical Spread (equity) | Net premium: STCG/LTCG based on holding | From spread opening date | Each leg tracked separately; straddle rules may apply |
| Iron Condor / Iron Butterfly | Net premium: typically STCG | Usually short-term (held < 60 days) | Straddle rules may apply β offsetting positions can defer losses |
| LEAPS (Long-dated calls/puts, equity) | LTCG if held >1 year | From purchase date | Sell LEAPS after 1 year for LTCG treatment; be careful of straddle rules |
| Straddle / Strangle (equity) | Straddle rules apply β deferred losses | Complex β offsetting position rules | Cannot take a loss on one leg while holding an offsetting profitable leg |
Key Takeaway: If you frequently trade index options (SPX, NDX, RUT), the 60/40 Section 1256 rule is a significant tax advantage vs trading individual stock options. At the 32% marginal rate, Section 1256 treatment effectively reduces your options tax rate from 32% to ~23.8% (60%Γ20% + 40%Γ32%).
Frequently Asked Questions
How are stock options taxed when I sell them?
Equity options (options on individual stocks or ETFs) are taxed like stocks: if held 1 year or less, gains are short-term capital gains taxed at ordinary income rates (up to 37%). If held more than 1 year, gains are long-term capital gains taxed at 0%, 15%, or 20% based on income. The holding period starts when you buy the option, not when the underlying stock moves.
What are Section 1256 contracts and how are they taxed?
Section 1256 contracts include futures contracts, options on futures, broad-based index options (SPX, NDX, RUT, VIX), and certain forex contracts. These receive special 60/40 tax treatment: 60% of gains/losses are treated as long-term capital gains regardless of holding period, and 40% are short-term. This is automatic β you don't need to hold for a year to get the preferential rate. It also applies to losses. Section 1256 contracts are marked to market at year-end.
Does the 60/40 rule apply to SPY options?
No. SPY, QQQ, IWM, and other ETF options are NOT Section 1256 contracts β they are equity options subject to normal short-term/long-term capital gains treatment. Only "broad-based index options" qualify: SPX, NDX, RUT, XSP, VIX options traded on regulated exchanges. ETF options tracking the same indexes are treated as equity options.
Can I deduct options trading losses?
Yes, but with limitations. Capital losses offset capital gains first. If losses exceed gains, up to $3,000 of net capital losses can be deducted against ordinary income per year. Excess losses carry forward indefinitely. For Section 1256 contracts, there's also a special 3-year carryback provision for net losses. Wash sale rules apply to equity options but not to Section 1256 contracts.
How are covered calls and protective puts taxed?
Covered calls: the premium received is not immediately taxable. If the call expires worthless, the premium is a short-term capital gain. If exercised, the premium is added to the sale price of the underlying stock. If you write a deep in-the-money covered call, it may stop the holding period clock on the underlying stock (qualified covered call rules). Protective puts: the premium paid increases your cost basis in the stock. If the put expires worthless, it's a capital loss. If exercised, the put premium adjusts the basis of stock sold.