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Section 1256 vs equity options: same profit, different tax bill

In the US, options on a broad stock index like SPX fall under Section 1256: gains are taxed 60% long-term and 40% short-term, however long you held them. Options on stocks and on ETFs like SPY are equity options, taxed by holding period, which for most option sellers means all short-term.

Comparison · 6-minute read · Updated 2026-11-09

The short answer

Section 1256 is a US tax rule for certain contracts, including options on a broad stock index and regulated futures. Two things make it different:

1. The 60/40 split. Every gain or loss counts as 60% long-term and 40% short-term, even on a one-week trade.
2. Year-end marking. Contracts still open on the last business day of the year are treated as sold at their market value that day. You report the gain or loss even if you didn't close.

Equity options, on single stocks and on most ETFs, follow the normal rules. A gain on an option held a year or less is short-term, taxed like your wages. Since most short options last weeks, a seller's equity-option gains are nearly always short-term.

As of October 2026, IRS Publication 550 lists broad-based stock index options as Section 1256 contracts, and names the S&P 500 index as a broad-based index. It defines an equity option as an option on a stock or on a narrow-based index. Section 1256 gains and losses go on Form 6781. In an IRA or 401k, none of this matters: gains inside those accounts aren't taxed year by year.

Side by side

Long-term gains are taxed at one of three federal rates, 0%, 15%, 20%, depending on income (irs.gov). Short-term gains are taxed at your ordinary income rate, which is usually higher.

A worked example: the same gain both ways (hypothetical)

You net $10,000 of option gains in a year in a taxable account. To keep it simple, say your long-term rate is 15% and your ordinary rate is a made-up 30%. That 30% is a round number for the example, not a real bracket.

Check another way: the 1256 blended rate is 0.6 × 15% + 0.4 × 30% = 21%, and 21% of $10,000 is $2,100.

That $900 is real, and it's why index options draw sellers. Now the cost of the second rule.

Year-end marking, worked (hypothetical)

On December 31 you still hold an index put spread worth $1,500 more than you sold it for. Under Section 1256, that $1,500 gain counts this year, split 60/40, even though the trade is open.

In January the market drops and you close the spread for $500 less than its December 31 value. That is a loss for the new year.

You paid tax on $1,500 first and booked the $500 loss a year later.

The ETF gray area

SPX is an index; SPY is an ETF that tracks it. SPY options are generally treated as equity options, and that's how most brokers report them. Options on some other exchange-traded products are less clear, and there isn't a simple IRS list that sorts every one. If your tax plan depends on a product being Section 1256, ask a tax professional and check how your broker reports it on your 1099-B.

Which should you trade?

Index options are cash-settled and many are big, so they don't fit the wheel strategy. See SPY vs SPX options for the size and settlement side, and AM settled vs PM settled for the expiry trap on some index contracts. The options strategy comparison chart shows which strategies need shares and which don't.

For Canadian residents filing in Canada, Section 1256 doesn't apply. The CRA's own rules decide how option gains are taxed, and options permissions differ by broker.

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