Ask the Institute

DATE: October 4, 2001

QUESTION:
What is the tax treatment for LEAPS® held for 18 months?

ANSWER:
There are a number of specific rules and regulations that apply to options transactions. Only a tax professional can give advice, and it is advisable to seek advice if you have any questions. Tax laws and rates may change without notice.

At the time this answer was written, the "maximum" tax rate on net capital gains (net long-term capital gains minus net short-term capital losses) was reduced from 28% to 20% for individuals in the top tax rate bracket. For sales after July 28, 1997, a holding period of more than 18 months is required for the 20% rate to apply. The 28% maximum tax rate on capital gains remains for sales with a holding period of more than 12 to 18 months.

For more information on the tax handling of options, a good starting point is to read the brochure "Taxes and Investing" which can be downloaded free of charge from the Web site of the CBOE at http://www.cboe.com/LearnCenter/pdf/TaxesandInvesting.pdf (.pdf format). This brochure contains information on capital gains and losses, both short-term and long-term, the wash-sale rule, covered calls, married puts, the special treatment of index options and several other relevant topics for option investors.