How premium is treated, why assignment isn't taxable, and where wash sales bite wheel traders.
2 min read
This is general information, not tax advice
It describes US federal treatment in broad terms and skips real complications: Section 1256, qualified covered call holding-period rules, state taxes, and anything specific to your situation. Your 1099-B is the authoritative record, not this page and not the app. Check figures against it and talk to a tax professional before filing.
| What happened | Treatment |
|---|---|
| Option expires worthless | Short-term capital gain equal to the premium, realised at expiration |
| You buy it back | Short-term gain or loss: premium received − premium paid |
| Short put is assigned | Not a taxable event. The premium reduces the cost basis of the shares |
| Covered call is assigned | Not taxed separately. The premium is added to the sale proceeds of the shares |
Short-term is the important word. Premium from options held under a year is taxed at ordinary income rates, not the lower long-term capital gains rate — and essentially all wheel premium is short-term. A strategy yielding 20% before tax can look quite different after it.
One full cycle
Sold a $50 put for $120, assigned. Not taxable — basis becomes $48.80/share.
Sold a $52 call for $90, expired worthless. $90 short-term gain, realised.
Sold another $52 call for $85, assigned. Shares sold at $52, proceeds treated as $52.85.
Stock gain: ($52.85 − $48.80) × 100 = $405 short-term.
Total realised for the year: $90 + $405 = $495.
A wash sale disallows a loss when you buy something substantially identical within 30 days before or after selling at a loss. The disallowed loss isn't lost — it's added to the basis of the replacement — but it can shift income into a year you didn't expect.
The wheel walks into this constantly
Buying back a put at a loss and selling another put on the same stock a week later is a textbook wash sale trigger. So is being assigned shares and selling more puts on the same name. Nothing improper is happening — it's simply what repeated selling on one ticker looks like, and it's why the tax summary can disagree with the P&L you feel you earned.
Wheel Folio's tax report flags potential wash sales for review rather than calculating them. Whether two contracts are "substantially identical" is a judgement involving strikes, expirations, and holding periods that a tracker shouldn't make on your behalf.
Educational only
Nothing here is investment, financial, or tax advice. Options carry risk, including losing more than the premium collected, and the examples use round numbers to show the mechanics rather than to suggest a trade. Read risk and position sizing before putting real money behind any of it.