How can trading stock index options reduce my capital gains tax?
As you probably know, short-term gains generated from investing in stocks and stock options are taxed at the same rate as ordinary income. This means any gains made from a stock or stock option investment held for less than one year are categorized as short-term and are taxed at the same rate as your tax bracket. Any gains made from a stock or stock option investment held for longer than one year are categorized as long-term and are taxed at 15% in most cases (5% if your tax bracket is below 25%). Gains made from broad-based stock index option trades are taxed differently than gains on stock options and stocks. Broad-based stock index options are considered IRC Section 1256 contracts. Therefore, any gains made on these stock index options are taxed under the 60/40 rule which states that gains made from trading these options are automatically treated as 60% long-term capital gain income and 40% short-term capital gain income regardless of how long the investment was held. This means, ev
