How Much Tax Do You Pay on Call Option Gains?

You report your option gains on IRS Form 6781 and Schedule D.

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Most profits from trading call options are short-term capital gains, on which you pay your marginal tax rate. In some circumstances, a call will lead to a long-term capital gain. When you buy a call, you have the right to buy some amount of an underlying asset for a pre-established price, the strike price, on or before an expiration date. Periods until expiration usually range from one to three months but can be longer.

Call Buyer’s Gains

If you offset your call for more that its original premium, you book a capital gain on the offset date. You offset a call by selling an identical one -- the two cancel each other out. You have a gain if the selling price for the offsetting call exceeds your original call's purchase premium. Most such capital gains are short-term -- you’d have to own the option for more than a year to get a long-term gain. If your call expires worthlessly, you have a capital loss on the expiration date. If you exercise the option, you add the call premium to the purchase price of the underlying asset, increasing its basis, or cost. If you eventually sell the asset for more than its basis, your gain will be short- or long-term on the sale date, depending on how long you hold the underlying asset before selling it.

Call Seller’s Gains

Your premium income is a short-term capital gain if and when the call expires. If the buyer exercises the call, you must sell the underlying asset to the buyer at the strike price. You subtract your premium income from the asset's purchase price, giving you your cost basis. You then subtract from your cost basis the proceeds you receive for selling the underlying asset to the call owner at the strike price. Your capital gain or loss on the exercise date will be long- or short-term depending on how long you held the asset before selling it to the buyer. Like the buyer, you can offset your option at any time before exercise or expiration. You do so by purchasing an identical call. You figure your profit or loss as of the offset date on the difference between the original premium and the subsequent purchase price of the offsetting call.

Long-Term Capital Gains Taxes

As of 2013, If your modified adjusted gross income exceeds $400,000 for an individual or $450,000 for a couple, the tax rate is 20 percent. Otherwise, you pay 15 percent if your marginal tax bracket is 25 percent or higher. If you’re in a lower bracket, the gain is tax-free. Capital losses offset capital gains and up to $3,000 of ordinary income. You can carry forward unused capital losses to future years.

Medicare Taxes

Beginning in 2013, you are on the hook for a 3.8 percent Medicare surcharge if your MAGI exceeds $200,000 for an individual or $250,000 for a couple. The IRS applies the 3.8 percent to the lesser of your investment income -- interest, dividends and capital gains -- and the amount your MAGI exceeds the noted thresholds.

Special Cases

If your call option is a long-term equity anticipation option, you might hold it for over a year before disposing of it. If you offset it for a profit, you record a long-term capital gain on that date. However, if you exercise a LEAP, you reset the clock on the underlying asset -- you would have to hold that asset for over a year to get long-term capital gains treatment. Straddles are complex trading positions that might involve options and other assets. If your trades qualify as straddles, you must follow special tax reporting rules as described in IRS Publication 550.

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About the Author

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