If you’re trading stock options, understanding how they're taxed is just as important as knowing how to place a trade. Depending on how you structure your trades, you could be facing ordinary income tax, short-term capital gains, or long-term capital gains.

Let’s break it down.

When you buy and sell standard options contracts (calls or puts), the IRS typically treats the profit or loss as a capital gain or loss. If you hold the option for less than one year, it’s a short-term capital gain, taxed at your ordinary income rate. If you hold it longer than a year, it's a long-term capital gain, which usually has a lower tax rate.

However, most options expire or are sold well before the one-year mark. That means many options traders end up paying short-term capital gains taxes—unless they’re using qualified retirement accounts or tax-managed strategies.

Things get more complex if you exercise the option. For example:

• Exercising a call option to buy a stock starts a new holding period for the shares.
• If you later sell those shares, you’ll pay taxes based on how long you held them and the difference between your cost basis and the sale price.

If you write (sell) options, the tax treatment depends on how the trade ends:

• If the option expires worthless, the premium is short-term income.
• If the option is exercised, your profit or loss is tied to the stock sale or purchase.
• For covered calls or cash-secured puts, the tax implications are tied to both the option and the underlying shares.

And then there’s Section 1256 contracts, which apply to certain index options (like SPX). These contracts are taxed under a 60/40 rule—60% long-term, 40% short-term—regardless of how long you held them.

As you can see, your tax treatment depends on the type of option, how you use it, and how the trade ends. Keeping clear records and understanding the rules can help you avoid surprises when tax season rolls around.

Taxes are just one part of trading smart—and getting them wrong can eat into your gains fast. That’s why Slingshot Trader teaches a structured, disciplined approach to options. We don’t just focus on the trade—we help you think through the full life cycle, from entry to exit, and what happens after.

Inside Slingshot Trader, you’ll learn:

• How to build repeatable, risk-defined strategies
• When to sell, when to let options expire, and what that means for your taxes
• How to keep your trading decisions clean, consistent, and informed

If you're tired of guessing and want a plan that actually accounts for what happens after the trade, this is the program to start with.

Get started with Slingshot Trader →

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