Know The Split For
60/40 Tax Treatment
Capital gains from trading index options get a hybrid tax treatment. Because index options are 1256 contracts,* they qualify for the 60/40 tax treatment—meaning 60% of your profits are treated as long-term capital gains and 40% as short-term capital gains. It doesn't matter how long you hold the position.
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60/40 Tax Treatment
Know the Split
Capital gains from trading index options get a hybrid treatment. Because index options are 1256 contracts,* they qualify for the 60/40 tax treatment -- meaning 60% of your profits are treated as long-term capital gains. It doesn't matter how long you hold the position.
Equity and ETF options, on the other hand, get taxed at the short or long-term capital gains rate depending on how long you hold the position. The tax rates are dependent on your income.
Remember that most options are generally short-dated products. As a result, options traders generally hold their positions for less than a year (considered short-term). So trading index options could mean tax savings, as 60% of any profits will get the more favorable long-term capital gain treatment. (Note that this tax benefit doesn't apply to IRAs or other non-taxable accounts.) Let's look at a hypothetical example.
Investor A, who's taxed at the 60/40 rate, has a potential tax savings of $1,350 | ||
Investor A is an index options trader, Investor B is an ETF options investor. Both made $15,000 in options trading profits at the end of the year. Both are in the 35% tax bracket and filing jointly. Their long-term capital gains tax rate is 20% | ||
Total profits | $15,000 | $15,000 |
---|---|---|
Short-term capital gains tax (@35%) | $2,100 | $5,250 |
Long-term capital gains tax (@20%) | $1,800 | $0 |
Total Tax | $3,900 | $5,250 |
Profits after tax | $11,100 | $9,750 |
Index options favorable tax treatment
Equity and ETF options get taxed at the short or long-term capital gains rate depending on how long you hold the position. The tax rates are dependent on your income.
Remember that most options are generally short-dated products. As a result, options traders generally hold their positions for less than a year (considered short-term).
So trading index options could mean tax savings, as 60% of any profits will get the more favorable long-term capital gain treatment.
(Note that this tax benefit doesn't apply to IRAs or other non-taxable accounts.)
Benefits Of Index Options:
Lapping The Competition
Your first thought might be "But can't you do that with stock or exchange-traded fund (ETF) options?" You can, but index options come with unique benefits worth exploring that you won't find with stock or ETF options.
Cash Settlement
Take pole position with cash settled index options - account credited or debited in cash
No Early Exercise Risk
The guardrail of European style: index options exercise only at expiration, no early assignment or exercise
Flexible Sizes, Expiration, and Market Exposure
Medium or hard tires: large & small cap index options, multiple sizes & expiries
Why Trade Index Options?
Crossing the Finish Line:
The Checkered Flag
Download our free guide to learn more about the potential benefits of index options and why you may want to consider them as part of your trading strategy.
SPX Product Suite Comparison
Cboe Index Options | ETF Options | |||
---|---|---|---|---|
NanosSM | Mini-SPX (XSP®) | SPX ® | Versus | SPDR ETF (SPY) |
1/100th of XSP | 1/10th of SPX | 1 | Contract Size | 1/10th of SPX |
$1 | $100 | $100 | Contract Multiplier | $100 |
$450 | $45,000 | $450,000 | Approx. Notional Size (if S&P 500 is $4,500) |
$45,000 |
Trading account credited or debited in cash | Settlement Type | Delivery of underlying shares | ||
European style, exercised at expiration, no risk of early exercise or assignment |
Exercise Style | American style, can be exercised or assigned prior to expiration | ||
Capital gains may benefit from 60% / 40% tax treatment* | Tax Treatment | Standard short- and long-term tax rules | ||
Standard market trading hours | Global trading hours available** | Extended Trading Hours | Standard market trading hours | |
Settlement and exercise style eliminate potential economic and tax risk for writers | Certainty of Settlement | After market contract assignment may result in unplanned residual positions |
Cboe Index Options Quick Links
Tradable Products:
Options Learning:
*Under section 1256 of the IRS tax code, profit and loss on transactions in certain exchange-traded options, including SPX options, are entitled to be taxed at a rate equal to 60% long-term and 40% short-term capital gain or loss, provided that the investor involved and the strategy employed satisfy the criteria of the tax code. Investors should consult with their tax advisors to determine how the profit and loss on any particular option strategy will be taxed. Tax laws and regulations change from time to time and may be subject to varying interpretations.
**Global Trading Hours (GTH). The trading hours for options on the SPX, SPXW (SPX Weeklys and SPX End-of-Month), and XSP (Mini-SPX) begin at 8:15 p.m. Eastern time and end at 9:25 a.m. Eastern time. Please visit the Hours & Holidays page for more details. Options involve risks and are not suitable for all investors. Before trading options, you should discuss with your broker whether trading options is right for you and review the Characteristics and Risks of Standardized Options (or Options Disclosure Document) regarding risks associated with trading options. There are important risks associated with transacting in any of the Cboe Company products or any of the digital assets discussed here. Before engaging in any transactions in those products or digital assets, it is important for market participants to carefully review the disclosures and disclaimers detailed at https://www.cboe.com/us_disclaimers/. These products and digital assets are complex and are suitable only for sophisticated market participants. These products involve the risk of loss, which can be substantial and, depending on the type of product, can exceed the amount of money deposited in establishing the position. Market participants should put at risk only funds that they can afford to lose without affecting their lifestyle.