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How are sold options taxed in the US? The basics
In a US taxable account, premium from an option that expires or is closed is usually a short-term capital gain. If you're assigned, the premium instead adjusts the cost or sale price of the shares. This is general information, not tax advice.
The short answer
This is general information, not tax advice; check with a tax professional or your broker. In a regular US taxable account, the basics for an option you sell usually work like this:
- It expires worthless: the premium is a short-term capital gain, no matter how long the option was open.
- You buy it back: the difference between what you collected and what you paid is a short-term gain or loss.
- A put is assigned: the premium lowers the cost basis of the shares you bought. Nothing is taxed yet.
- A call is assigned: the premium is added to the sale price of your shares. The gain or loss on the shares is short- or long-term depending on how long you held them.
Inside an IRA or Roth IRA, trades aren't taxed each year. The rules there are about withdrawals instead.
Why assignment changes the math
When you're assigned, the IRS doesn't treat the premium as a separate gain. It folds it into the share trade.
That matters for the wheel strategy, because the wheel is built around assignment. Your tax picture depends on the shares as much as on the options.
Cost basis is the price the tax rules say you paid for the shares. After a put assignment, that's the strike minus the premium. Our guide on cost basis after assignment shows the math step by step.
A worked example through one wheel cycle (an illustration, not a trade idea)
All numbers are made up. The tax labels are the general rules described above.
March. You sell one $45 put on a made-up stock, XYZ, for $1.00 ($100).
April. You're assigned. You buy 100 shares at $45. Your cost basis is $45 − $1 = $44 a share, or $4,400. No tax yet on the $100.
May. You sell one $47 covered call for $0.80 ($80).
Now three different endings:
| Ending | What happens | Result for tax purposes (general rule) |
|---|---|---|
| A. June: called away at $47 | Sale price $4,700 + $80 premium = $4,780. Basis $4,400. | +$380, short-term (shares held under a year) |
| B. June: call expires, XYZ falls; you sell the shares at $38 | The $80 call premium is a short-term gain. Shares: $3,800 − $4,400. | +$80 short-term gain, −$600 short-term loss |
| C. Same as A, but shares held over a year before being called | Same numbers | +$380, long-term (held over a year) |
Ending B is a real loss of $520 overall. The tax rules record it as two separate items: an $80 gain and a $600 loss. Your broker's forms will usually show them that way too.
Notice that the original $100 put premium never shows up on its own. It's hidden inside the $4,400 basis. That's normal, and it's why tracking your own numbers matters.
Wash sales and other traps
Wash sales. If you sell shares at a loss and buy "substantially identical" shares within 30 days before or after, the loss can be disallowed for now and added to the new shares' basis. Options can count. For example, selling shares at a loss and then being assigned on a put on the same stock within 30 days can trigger it. Some short puts can also count, depending on the details. See Wash sale (options).
For wheel sellers, this comes up often: you sell shares at a loss, then sell a new put on the same stock right away. Ask a tax professional how it applies to your trades.
Covered calls and holding periods. Some covered calls, especially ones deep in the money, can fall under special "straddle" rules. Those can pause the holding period on your shares, or delay a loss. Calls closer to the share price are often treated more simply. This is an area to check with a professional before you rely on long-term treatment.
Index options vs ETF options. Options on some broad stock indexes are taxed under different rules, with part treated as long-term regardless of holding time. Options on ETFs, such as SPY, are usually taxed like stock options. Check before you assume either.
State taxes. Most states tax capital gains too, and the rules vary.
What your broker sends you
Your broker reports sales and closed options on Form 1099-B. After an assignment, the basis it reports for the shares should already include the premium, but brokers sometimes show things differently, especially for wash sales across accounts. Keep your own record of each trade:
- Date sold, strike, premium collected.
- How it ended: expired, closed, assigned, called away.
- Basis of any shares, with the premium included.
- Any shares sold at a loss within 30 days of a new put or share purchase on the same stock.
A simple tracking sheet makes tax time much easier. See wheel strategy tracking spreadsheet.
IRA, Roth IRA and taxable accounts
| Account | Taxed each year? | What's often allowed |
|---|---|---|
| Taxable brokerage | Yes, gains and losses as they happen | Covered calls, cash-secured puts, more with approval |
| Traditional IRA | No; withdrawals taxed later | Covered calls; cash-secured puts at many brokers |
| Roth IRA | No; qualified withdrawals tax-free | Same as a traditional IRA at most brokers |
Losses inside an IRA can't be deducted. A wash sale between your taxable account and your IRA can still be a problem. See the wheel strategy in an IRA.
If you live in Canada, the rules are different. See taxes on selling options in Canada.
What to do before your first sale
- Decide which account you'll use, and check your broker's options rules for it.
- Start a trade log with the four items above.
- Before you sell shares at a loss, check whether you've sold a put on the same stock, or plan to, within 30 days.
- Talk to a tax professional before your first year of filing with options, especially if you plan many trades or deep in-the-money calls.
Questions
How is option premium taxed when I sell an option?
In general, if the option expires, the premium is a short-term capital gain. If you buy it back, the difference is a short-term gain or loss. If you're assigned, the premium adjusts the share basis or sale price instead. This is general information, not tax advice.
Does assignment on a put trigger a tax?
Not by itself, under the general rule. You've bought shares. The premium lowers their cost basis, and tax comes later when you sell the shares.
Can a covered call make my gain long-term?
The share gain can be long-term if you've held the shares over a year when they're called away. Some deep in-the-money calls can affect that holding period, so check with a professional.
Do wash sale rules apply to options?
They can. Selling shares at a loss and being assigned on a put, or buying shares back, within 30 days can disallow the loss for now. The details matter, so ask a tax professional or your broker.
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