Short-Term & Long-Term Capital Gains

Capital gains are the profits from selling an asset for more than you paid. Short-term capital gains apply to assets held for one year or less and are taxed at your ordinary income tax rate (10% to 37% depending on your bracket). Long-term capital gains apply to assets held for more than one year and are taxed at preferential rates of 0%, 15%, or 20%. For most options traders, nearly all profits are short-term because options are rarely held for longer than a year.

Why It Matters

The difference between short-term and long-term tax rates can be dramatic. A trader in the 32% federal bracket pays 32 cents in tax on every dollar of short-term gain but only 15 cents on long-term gains. That is more than double the tax rate. On $50,000 in annual options profits, the difference is $8,500 in additional tax.

This rate difference is why Section 1256 contracts (index options like SPX) are so popular with active traders — they receive the 60/40 blended rate regardless of holding period. It is also why LEAPS (options with more than one year to expiration) have a unique tax consideration: if held for over one year, their gains can qualify as long-term.

How It Works

2024-2025 long-term capital gains rates:

• 0%: Single filers with taxable income up to ~$47,000; married filing jointly up to ~$94,000
• 15%: Single filers up to ~$518,000; married filing jointly up to ~$583,000
• 20%: Above those thresholds

Short-term capital gains rates: Same as your ordinary income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, or 37% depending on total taxable income.

How this applies to options:

• Most options trades (held days to weeks): Short-term capital gains. Taxed at your full ordinary income rate.
• LEAPS held over one year: If you buy a LEAPS call and hold it for more than 12 months before selling, the gain qualifies as long-term. This is one of the few ways to get long-term treatment on options.
• Section 1256 index options: Receive 60% long-term / 40% short-term treatment automatically, regardless of how long you held the position. This makes every trade partially long-term.
• Covered calls: Complex rules. If the covered call is "qualified" (sufficiently out-of-the-money), it does not affect the stock's holding period. If "unqualified" (too close to the money), it can suspend or restart the holding period on the stock, potentially converting a long-term stock gain to short-term.

State taxes add up: Most states also tax capital gains. California adds up to 13.3%, New York City up to 12.7%. A trader in California earning $100,000 in short-term options profits could face a combined federal and state rate above 45%.

Strategies to minimize the tax bite:

• Trade index options (SPX, NDX, RUT) for 60/40 treatment.
• Hold LEAPS for over one year when possible.
• Trade in tax-advantaged accounts (IRA, Roth IRA) where gains are deferred or tax-free.
• Harvest losses strategically at year-end to offset gains (watch the wash sale rule).

Quick Example

You made $30,000 in options profits this year. You are in the 24% federal bracket and live in a state with 5% income tax. If all gains are short-term: $30,000 x 29% = $8,700 in tax. If you had traded SPX instead and received 60/40 treatment: ($18,000 x 15%) + ($12,000 x 24%) + ($30,000 x 5%) = $2,700 + $2,880 + $1,500 = $7,080 in tax. The 60/40 treatment saved you $1,620 on the same profits.