Hi, could someone please quickly check that I'm understanding this table correctly: https://www.schwab.com/learn/story/how-are-options-taxed
For buying a long call, the first scenario is simple: "If you close the position before expiration, the holding period of the option determines if it's taxed at short- or long-term capital tax rates." So if Bob rolls the call option after a year, that induces a tax on the long-term gain.
The second is the important one that I want to check: For buying a long call, "If you exercise the option, Exercising a call option increases the cost basis of the stock that is purchased. There is no taxable event until the stock is finally sold. Once sold, the holding period of the stock determines if the capital gain or loss is short- or long-term." So if Bob buys a 2-year long call option for a strike price of $100 for $50/share, then lets the option automatically exercise on the expiration date, then immediately sells for $200/share, the result is that the $5000 profit would be taxed at short-term capital gain?
This is clear from the table, but I just want to check because it's obvious that waiting for expiration on call options doesn't make sense because of theta decay alone, yet I'm surprised I also haven't heard more about the major tax disadvantage as well.
I realize this is a basic question, so l'll delete the post if someone could please give me the green light that I'm reading this correctly. (And that this still holds for 2026).
Posted by noncompact_leaf
1 Comment
You’re correct.
You probably don’t hear about it more often as it is something of a standard process to roll up your LEAPS call’s strike, or extend the timeframe. In other words, I suspect it’s an outlier case where someone is actually holding their LEAPS call for more than one year before they let it exercise. I also suspect that the conversion rate of LEAPS is pretty low, but that’s just speculation on my part. I invest heavily in LEAPS and have never converted, nor do I ever expect to do so.