Yes, XSP is cash settled. When a Mini-SPX (XSP) option expires in the money, the Options Clearing Corporation moves cash from the seller’s account to the buyer’s account based on the difference between the strike price and the index’s final settlement value.1Cboe. XSP Index Options – Fact Sheet No shares change hands, because XSP tracks an index rather than a tradable security. That same structural feature — being tied to a broad-based index rather than individual stocks — is what qualifies XSP for Section 1256 tax treatment, with its 60/40 blended long- and short-term rate.
How the Cash Payment Is Calculated
Each XSP contract carries a $100 multiplier. If you hold a 500-strike call and the settlement value comes in at 510, you receive (510 − 500) × $100, or $1,000. Put options work the same way in reverse.2Cboe. Settlement of Standard, A.M.-Settled S&P 500 Index Options Out-of-the-money contracts simply expire worthless; nothing is owed and nothing is received.
XSP is sized at one-tenth of a standard SPX contract. Notional value equals the index level × $100 × 1/10.3Cboe. XSP (Mini-SPX) Index Options With the S&P 500 at 5,500, one XSP contract represents $55,000 in exposure, compared with $550,000 for a full-size SPX contract.
How the Settlement Value Is Set
XSP uses PM settlement. The final settlement value equals one-tenth of the official closing price of the S&P 500 Index on the last trading day of the expiring series.1Cboe. XSP Index Options – Fact Sheet That contrasts with standard SPX options, which are AM-settled from a Special Opening Quotation calculated off the opening trade prices of the 500 constituent stocks on expiration morning.2Cboe. Settlement of Standard, A.M.-Settled S&P 500 Index Options
The practical effect is that XSP’s final value reflects the full trading day, including late-session moves, and lines up closely with where the index actually closes. Cash is delivered by the OCC on the next business day after expiration.1Cboe. XSP Index Options – Fact Sheet
European-Style Exercise
XSP options are European-style, so they can only be exercised at expiration. For sellers, this removes the risk of early assignment; you will not be forced into a cash obligation before expiration day.4Cboe. Index Options Benefits European Style You can still exit a position anytime the market is open by entering a closing trade. The European-style rule limits exercise, not trading.
Section 1256 Tax Treatment
Because the S&P 500 is a broad-based index, XSP qualifies as a nonequity option under Section 1256 of the Internal Revenue Code. The headline benefit is the 60/40 rule: 60% of any gain or loss is treated as long-term and 40% as short-term, regardless of how long you held the contract.5Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market For 2026, long-term capital gains rates are 0%, 15%, or 20% depending on taxable income.6Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates The short-term portion is taxed at ordinary income rates. A trader holding stock or ETF options for less than a year would see the entire gain taxed as short-term, so the blended rate can lower your bill meaningfully.
Mark-to-Market at Year-End
Section 1256 requires you to mark all open positions to market on the last business day of the tax year. Any XSP contract you still hold is treated as though you sold it at fair market value that day, with the resulting gain or loss reported on that year’s return.5Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market When you eventually close the position, your basis reflects the marked value, so the same gain is not taxed twice.
Wash Sale Exemption
Section 1256 contracts are exempt from the wash sale rule. The IRS instructions for Form 6781 confirm that “the wash sale rules don’t apply” under the mark-to-market framework.7Internal Revenue Service. Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles You can close an XSP position at a loss and reopen a similar one right away without the IRS disallowing that loss, a flexibility stock and ETF option traders do not have.
Net Investment Income Tax
If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), XSP gains may also be subject to the 3.8% net investment income tax on top of regular capital gains rates.8Internal Revenue Service. Topic No. 559 – Net Investment Income Tax The NIIT reaches income from trading in financial instruments, including Section 1256 contracts. If you are near or above those thresholds, work it into your after-tax return calculations.
Reporting on Form 6781
Report XSP gains and losses on IRS Form 6781, Gains and Losses From Section 1256 Contracts and Straddles. The form splits your net result into the 60% long-term and 40% short-term portions, which then flow to Schedule D.9Internal Revenue Service. About Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles Your broker will usually issue a year-end statement covering both realized and unrealized gains and losses on Section 1256 contracts, but the responsibility for accurate reporting sits with you.
The Loss Carryback Election
Section 1256 comes with a carryback option that ordinary capital losses do not offer. If you have a net Section 1256 loss for the year, you can elect to carry it back to the three preceding tax years, starting with the earliest, to offset Section 1256 gains reported in those years. The carried-back loss keeps its 60/40 character: 60% offsets prior long-term gains and 40% offsets prior short-term gains. The carryback cannot exceed net Section 1256 gains in the prior year and cannot create or increase a net operating loss.10Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers
Estates and trusts cannot make this election. If you don’t carry losses back, or you have no prior Section 1256 gains to soak them up, the standard capital loss carryforward rules apply instead.
A Note on Straddles
The clean 60/40 treatment can be modified if you hold XSP as part of a straddle, meaning offsetting positions that substantially reduce your risk of loss. Under the mixed straddle rules, gains and losses from the Section 1256 leg and the non-Section 1256 leg are netted against each other before the 60/40 split is applied to what remains from the Section 1256 contracts.11eCFR. 26 CFR 1.1092(b)-3T – Mixed Straddles The Section 1256 character survives, but the netting can shrink the tax advantage. If you regularly pair XSP with stock positions or other derivatives as hedges, get a tax advisor involved before you file.