How Options Are Taxed: Section 1256 & the 60/40 Rule

Two traders can run the identical strategy, close identical gains, and owe meaningfully different tax bills — purely because one traded SPX and the other traded SPY. This is one of the least-discussed edges in options trading, and it's entirely a function of which instrument you choose, not how you trade it.

This article is educational only and is not tax advice. Tax rules are fact-specific and change; talk to a qualified CPA or tax professional about your own situation before making decisions based on tax treatment.

The general rule: options are usually taxed like any other capital asset

Most equity and ETF options — including SPY — follow standard capital gains rules. Close a position you've held under a year and the gain is short-term, taxed at your ordinary income rate. Hold over a year (rare for anyone trading 0DTE or short-dated options) and it's long-term, taxed at the lower capital gains rate. Straightforward, and exactly what most traders expect.

Section 1256 contracts: a different rulebook

Section 1256 of the Internal Revenue Code applies to certain regulated instruments — including options on broad-based stock indices like SPX, NDX, and RUT — and gives them two distinct advantages over standard capital-asset tax treatment:

The 60/40 split. Regardless of how long you actually held the position — even if it was opened and closed same-day, as every 0DTE trade is — 60% of the gain or loss is treated as long-term capital gain and 40% as short-term. For most traders, the long-term rate is meaningfully lower than the short-term (ordinary income) rate, so this blended treatment lowers the effective tax rate on gains compared to an equivalent SPY trade closed in the same session.

Mark-to-market at year-end. Section 1256 contracts still open on December 31 are treated as if sold at fair market value that day, with any gain or loss recognized for that tax year even though the position is still open. This simplifies year-end accounting but means you can owe tax on an unrealized gain if you're still holding a position into the new year.

Why SPX qualifies and SPY doesn't

The determining factor is whether the underlying is a broad-based index or a single security/ETF. SPX options are options on the S&P 500 index itself — a broad-based index — so they qualify for Section 1256 treatment. SPY options are options on an ETF (a security that happens to track the index), not the index directly, so they don't. See SPX vs SPY Options: What Actually Differs for the full list of mechanical differences this distinction creates, settlement and assignment included, not just tax.

What this means in practice for an active trader

For someone running the 0DTE SPX strategy or any structure that closes same-day — iron condors, credit spreads, directional plays — every single trade gets the 60/40 treatment automatically, with no holding-period requirement to qualify. That's a structural tax advantage of choosing SPX as the underlying that has nothing to do with strategy or skill; it's a function of the instrument itself. It's one more reason SPX has become the default underlying for structured 0DTE trading rather than SPY, alongside the cash-settlement and no-early-assignment advantages covered in the SPX vs SPY comparison above.

What this article does not cover

Wash-sale rules, straddle rules under Section 1092, state tax treatment (which varies and often does not follow federal Section 1256 rules), and how this interacts with trader tax status or mark-to-market elections under Section 475 are all real, relevant topics for an active trader and all outside the scope of an educational overview. This is the starting map, not the whole territory — bring the specifics of your own trading activity to a tax professional.

Put it to work

BlackOut's SPX-focused tools — SPX Slayer, Thermal, Night Hawk — are all built around the instrument that carries this tax treatment. Get access →

BlackOut provides educational tools and market analysis only and does not provide investment or tax advice. This article is not tax advice — consult a qualified tax professional about your own situation. Options trading involves substantial risk and is not suitable for every investor.