To report options trading on your tax return, you use three IRS forms: Form 8949 for each equity option trade, Schedule D to summarize your net capital gains and losses, and Form 6781 for broad-based index options and other Section 1256 contracts. Which forms apply depends on what you traded. Options on individual stocks and narrow-based indexes go through 8949 and Schedule D under the regular capital gains rules. Options on broad-based indexes like the S&P 500 (SPX) or Russell 2000 (RUT) go through Form 6781 under the 60/40 rule.1Office of the Law Revision Counsel. 26 U.S. Code 1256 – Section 1256 Contracts Marked to Market
All three forms are available on irs.gov, and you need the versions dated for the tax year you are filing.2Internal Revenue Service. About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
Form 8949: Every Equity Option Trade Gets Its Own Line
Each equity option position you closed during the year is a separate line entry on Form 8949. For every trade, you enter a description of the position (for example, “100 XYZ Jan 50 Call”), the date you opened it, the date you closed it, your proceeds in column (d), and your cost basis in column (e). Subtract basis from proceeds and you have your gain or loss.3Internal Revenue Service. Instructions for Form 8949
Trades you held one year or less go in Part I as short-term. Trades held longer than a year go in Part II as long-term. Most option positions land in Part I because standard listed options expire in weeks or months; LEAPS held past the one-year mark are the usual exception.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses
How Each Ending Scenario Gets Entered
An option can close in four ways, and each produces a different set of entries.
Closed by offsetting trade. Enter the opening date, the closing date, the premium you paid or received to open (basis or proceeds, depending on which side you were on), and the offsetting amount when you closed.
Expired worthless as the buyer. Use the expiration date as the sale date. Proceeds are zero. Your loss equals the premium you paid. Short-term or long-term depends on how long you held the option before it expired.
Expired worthless as the writer. Use the expiration date as the sale date. Cost basis is zero. The premium you collected is the gain, and it is short-term regardless of how long the option was open. A covered call written eight months ago that expires unexercised still produces a short-term gain.
Exercised or assigned. The option itself does not generate a standalone line on Form 8949 in this case. The premium folds into the stock transaction. If you exercised a call, add the premium to the strike price to get your stock cost basis. If you exercised a put, subtract the premium from the strike to get your sale proceeds on the stock. If you were assigned on a short call, your stock sale proceeds equal the strike price plus the premium you collected. If you were assigned on a short put, your basis in the new shares equals the strike minus the premium you received. The holding period for stock acquired through exercise starts the day after acquisition, not the day you bought the option.
Wash Sale Adjustments
If a wash sale disallowed part of a loss, you enter the disallowed amount in column (g) with code “W” in column (f). The disallowed loss is not gone; it gets added to the basis of the replacement position and comes back to you when you sell that position.5Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
Options complicate this. The wash sale rule applies when you sell a security at a loss and buy a substantially identical one within 30 days before or after. Buying a call on the same underlying stock within that window can trigger the rule even though you did not repurchase the shares themselves. Your brokerage tracks wash sales for identical positions within the same account, but it will not catch them across accounts or between stock and option positions in different accounts. That tracking is on you, and it is where the codes on your 8949 have to line up with what actually happened.
Schedule D: Where the Totals Land
Once every equity option trade is on Form 8949, the column totals move to Schedule D. Short-term totals from Part I of Form 8949 flow to Part I of Schedule D. Long-term totals from Part II flow to Part II. Schedule D nets short-term gains and losses against each other, does the same for long-term, then combines the two into a single net capital gain or loss.
If losses exceed gains overall, you can deduct up to $3,000 of the net loss against ordinary income ($1,500 if married filing separately). Anything above that limit carries forward to future tax years indefinitely, keeping its short-term or long-term character.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses6Office of the Law Revision Counsel. 26 USC 1211 – Losses From Sales or Exchanges of Capital Assets
Schedule D is also where Form 6781 results merge in, if you traded any Section 1256 contracts.
Form 6781: Broad-Based Index Options and the 60/40 Rule
Section 1256 contracts do not go on Form 8949. They go on Form 6781. This category covers nonequity options (listed options that are not on individual stocks or narrow-based indexes), regulated futures contracts, and foreign currency contracts. Options on broad-based indexes such as SPX and RUT qualify. Options on individual stocks and most ETFs do not, even if the ETF tracks a broad index.1Office of the Law Revision Counsel. 26 U.S. Code 1256 – Section 1256 Contracts Marked to Market
Section 1256 contracts get two special treatments that Form 6781 is built around:
- 60/40 split. Sixty percent of any gain or loss is treated as long-term and 40 percent as short-term, regardless of how long you held the position.
- Mark-to-market. Open positions at year-end are treated as if you sold them at fair market value on the last business day of the tax year. The unrealized gain or loss is reported on the current-year return.7Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles
Filling Out Part I
Part I of Form 6781 is where you enter your gains and losses from Section 1256 contracts. Include both realized results from positions you closed and the mark-to-market adjustment for positions still open on December 31.
The form does the 60/40 arithmetic for you. Your net Section 1256 gain or loss goes on line 7. Line 8 multiplies that number by 40 percent to get the short-term portion. Line 9 multiplies by 60 percent for the long-term portion. The short-term amount then flows to line 4 of Schedule D, and the long-term amount flows to line 11 of Schedule D.8Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles From there, it combines with your equity option results into the single net figure on Schedule D.
The Year-End Mark-to-Market Entry
If you held open SPX contracts (or other Section 1256 positions) on December 31, your year-end brokerage statement should show the fair market value used for the deemed sale. Cross-reference that number against what you enter on Form 6781. It is your proceeds figure for the mark-to-market entry, and it becomes your cost basis when the position carries into the next tax year. Skipping this step or using the wrong figure will throw off both the current return and the next one.
Part II and Straddles
Part II of Form 6781 handles straddle positions under Section 1092, which defers losses on offsetting positions until you close both sides. If you held two positions that substantially offset each other’s risk, you generally cannot deduct a loss on one side until the other side is also closed, and the deferred loss gets added to the basis of the remaining position. Most retail traders do not use Part II. If you did run offsetting positions during the year, that is where the deferral is reported.
One related boundary worth knowing: entering certain offsetting positions against appreciated stock you already own can trigger a constructive sale under Section 1259, forcing you to recognize gain on the stock as if you sold it on the date you entered the offsetting position.9Office of the Law Revision Counsel. 26 USC 1259 – Constructive Sales Treatment for Appreciated Financial Positions The classic example is a collar (deep-in-the-money put plus deep-in-the-money short call at the same strike) on stock you hold at a gain. If any of your positions could fall under this rule, the deemed stock sale gets reported through the normal capital gains mechanism, not Form 6781.
Covered Calls and Holding Periods
Writing a covered call against stock you own can affect the holding period on that stock, which changes how the stock sale itself gets reported down the road. A “qualified covered call” must have more than 30 days to expiration and a strike price that is not deep in the money. Write one at or out of the money that meets those tests, and your stock’s holding period keeps ticking. Write a qualified call that is in the money, and the holding period is suspended while the call is open. A non-qualified covered call on stock you have held less than a year kills the holding period entirely, and a new one starts only after the call is closed. When the stock eventually sells, the short-term or long-term determination depends on the corrected holding period, not on the calendar days you owned the shares.
Reconciling With Your 1099-B
Your brokerage will send Form 1099-B by mid-February. It reports gross proceeds and cost basis for each trade that closed during the year, and the IRS gets a copy.10Internal Revenue Service. Instructions for Form 1099-B Mismatches between what you report and what the broker reported are flagged automatically.
Check the numbers before you file. Brokers frequently get cost basis wrong on options, especially for positions that were part of a multi-leg strategy, rolled into a new expiration, or adjusted after a corporate action. Where the broker did not report cost basis (which happens with some older option positions), the IRS may treat your basis as zero and tax you on the full proceeds. Your own trade logs (opening and closing dates, premiums paid and received, commissions) are the defense against that.
Deadlines, Penalties, and Records
The filing deadline for 2025 tax returns is April 15, 2026. You can get a six-month extension to file, but not to pay. Any tax owed is still due April 15, and interest starts accruing on unpaid balances the next day.11Internal Revenue Service. Pay Taxes on Time
Two penalties can stack if you miss the deadline. The failure-to-file penalty is 5% of the unpaid tax for each month or part of a month the return is late, up to 25%.12Internal Revenue Service. Failure to File Penalty The failure-to-pay penalty is 0.5% of the unpaid tax per month, also capped at 25%.13Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges The failure-to-file penalty is ten times steeper. If you cannot pay everything you owe, file on time anyway and set up a payment plan; that eliminates the larger penalty immediately.
E-filed returns typically produce refunds within three weeks; paper returns take six weeks or more.14Internal Revenue Service. Refunds Keep copies of every filed form, your 1099-Bs, trade logs, and supporting records for at least three years from the filing date. That is the standard period during which the IRS can assess additional tax on a return.15Internal Revenue Service. How Long Should I Keep Records If you find an error after filing, submit an amended return on Form 1040-X as soon as you can and pay any additional tax owed.