How are the gains taxed on this strategy of writing credit spreads and iron condors on the MID and RUT indexes?
Because the MID (S&P 400 Mid Cap Index) and the RUT (Russell 2000 small cap index) are classified as cash settled, broad market indexes options that are traded on these indexes are taxed per the IRS Section 1256 contracts 60/40 rule. Per the 60/40 rule, sixty percent of the gains are taxed as long-term capital gains which is currently at 15%, and 40% of the gains are taxed as standard earned income. By placing option trades on cash settled, broad market indexes we get generous tax benefits. For more information, do a Google search on “IRS section 1256 tax 60/40 rule” and you will find more information on this topic. Here also is a link to the IRS tax form 6781: http://www.irs.gov/pub/irs-pdf/f6781.pdf; Here is another link to a software company that automates the generation of tax forms and they seem have a lot of information on this topic: http://www.armencomp.com/options-capital-gains.html#index. Please make sure to talk to a tax professional for all up to date information on this to
