Selling options generates cash, and cash gets taxed. The rules for stock and ETF options are simpler than most traders fear — but they have a few traps, especially around assignment. (Futures options get special treatment of their own — see the 60/40 guide.) This is plain-English orientation, not tax advice: talk to a tax professional about your situation.

The basic rule: premium is taxed when the trade closes

When you sell an option and it expires worthless, the premium you collected is a short-term capital gain — taxed at your ordinary income rate, like wages. Same if you buy it back to close for less than you sold it for: the difference is a short-term gain. If you buy it back for more than you collected, the difference is a short-term capital loss.

Notice: there is no long-term treatment here. It doesn't matter that you "held" the position for months — gains and losses on sold equity options are short-term unless the underlying shares get involved (below). (Options you buy and hold over a year — like LEAPS — can qualify for long-term treatment, and broad-based index options such as SPX get the 60/40 split described in the futures tax guide, whether bought or sold. What follows is the seller's world, which is where this site lives.) A premium seller harvesting all year is generating a stream of short-term gains. Plan for it; don't discover it in April.

Assigned on a put: the premium joins your cost basis

Sell a $95 put for $2.00, get assigned: you buy 100 shares at $95, paying $9,500. The $200 premium isn't taxed as a separate gain — instead it reduces your cost basis to $93 per share ($9,500 − $200, divided by 100).

Why this matters: when you later sell those shares, your gain or loss is measured from $93, not $95. And that gain or loss can be long-term if you hold the shares more than a year. Assignment converts option premium into stock basis — the tax event moves to whenever you sell the shares.

Called away: the premium joins your sale proceeds

The mirror image. You own 100 shares (basis $80) and sell a covered call with a $95 strike for $2.00. The stock rallies and your shares are called away at $95. The $200 premium is added to your sale proceeds: you sold for $9,700 total against an $8,000 basis.

Whether that gain is short- or long-term depends on how long you held the shares — the option doesn't reset the clock, with one wrinkle: selling certain deep in-the-money covered calls can suspend your holding period. If you run covered calls on long-held stock, check this with your tax pro before selling very low-strike calls.

Wash sales: the 30-day trap

Close a losing trade and the IRS may not let you claim the loss yet. If you realize a loss on a stock or option and buy a substantially identical position within 30 days before or after, the wash sale rule disallows the loss for now — it gets added to the basis of the replacement position instead.

Premium sellers trip on this constantly: you take a loss closing a put on XYZ, then sell another put on XYZ two weeks later. The loss isn't gone — it's deferred into the new position's basis — but your records (and your broker's 1099, which may not track options wash sales across all your accounts) need to reflect it. Active sellers should assume wash sales happen and keep their own trade log.

What your broker reports (and doesn't)

Your broker sends a 1099-B listing proceeds from closed trades. What it often does not do reliably: track wash sales across different accounts, adjust basis for assigned options correctly in every case, or separate your option trades from your stock trades in a way that matches your strategy. Keep your own ledger. A simple spreadsheet — date, trade, premium in, premium out, result — beats reconstructing a year of trades every April.

Example

You sell 10 cash-secured puts through the year, collecting $3,000 in premium. Seven expire worthless, two you close early for a combined $400 loss, one assigns you shares (premium folds into basis, no tax event yet). Come April: roughly $2,100 − $400 = about $1,900 of net short-term gains to report, one stock position with a reduced basis, and a trade log that proves every number. No surprises — because you planned for short-term treatment all year.

The short version

  • Premiums from selling equity options are short-term gains or losses, taxed at ordinary rates. Plan for it all year.
  • Assigned puts: premium reduces your shares' cost basis. Called-away shares: premium adds to sale proceeds.
  • Share gains can still be long-term — assignment doesn't reset your holding clock (mind deep-ITM covered calls).
  • Wash sales defer losses when you re-enter within 30 days. Keep your own log; don't trust the 1099 alone.
  • Futures options are different — 60/40 treatment, not this. See the futures tax guide.
  • This is education, not tax advice. A pro is worth it once real money is involved.

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