Since you’re rolling LEAPS and short calls, the goal is to reduce short-term capital gains taxes and maximize long-term tax benefits. Here's the best approach:
1. Hold LEAPS for Over a Year to Qualify for Long-Term Gains
- Why? LEAPS held for more than 1 year before selling qualify for long-term capital gains tax rates (lower than short-term rates).
- How?
- Buy a deep in-the-money (DITM) LEAPS with at least 1.5 to 2 years to expiration.
- Keep rolling short calls but don’t sell the LEAPS for at least 1 year.
- If you must roll your LEAPS, do it after holding for 1 year to get better tax treatment.
2. Manage Short-Term Taxable Income from Sold Calls
Since every short call premium is taxed as short-term capital gains, consider these techniques:
- Sell lower-premium calls to reduce taxable income (especially in high-tax years).
- Roll calls only when needed—if a short call is at risk of assignment, roll it forward but keep total realized gains controlled.
- Harvest losses to offset short-term gains—if you have a losing trade, sell before year-end to balance out short-call income.
3. Avoid the Wash Sale Rule When Rolling LEAPS
- The wash sale rule disallows losses if you sell a LEAPS at a loss and buy another similar LEAPS within 30 days.
- How to avoid it?
- If rolling LEAPS at a loss, wait 31 days before repurchasing.
- Buy a LEAPS with a different strike price or expiration to avoid a “substantially identical” issue.
4. Plan LEAPS Sales for a Low-Income Year
- If possible, time the sale of LEAPS in a year where your overall taxable income is lower (e.g., if you have business losses or lower wages).
- This minimizes capital gains tax, especially if you can stay in the 0% or 15% long-term capital gains bracket.
5. Consider Trading in a Tax-Advantaged Account
If you trade PMCCs frequently, consider using:
- Roth IRA (tax-free gains, but no deduction for losses).
- Traditional IRA (tax-deferred growth, but limits on option strategies).
- Solo 401(k) or SEP IRA (if self-employed, tax-deferred growth).
👉 These accounts eliminate short-term tax issues, but check if options trading is allowed in your brokerage.
Final Optimized Strategy Recap
- Hold LEAPS >1 year for lower long-term capital gains tax rates.
- Manage short call premiums to control short-term taxable income.
- Avoid wash sale rules when rolling LEAPS at a loss.
- Time LEAPS sales strategically in low-income years.
- Consider tax-advantaged accounts to bypass short-term taxation.
Final Optimized Strategy Recap
- Hold LEAPS >1 year for lower long-term capital gains tax rates.
- Manage short call premiums to control short-term taxable income.
- Avoid wash sale rules when rolling LEAPS at a loss.
- Time LEAPS sales strategically in low-income years.
- Consider tax-advantaged accounts to bypass short-term taxation.
What Happens If I Keep Buying LEAPS Using My Sell Gains?
1. Tax Treatment When Reinvesting Gains into New LEAPS
- Every time you sell a short call and collect a premium, that income is taxable in the year received, even if you immediately use it to buy more LEAPS.
- The purchase of new LEAPS does not offset the taxable income from short-call sales.
- If you roll the LEAPS before holding for a year, any gains on the LEAPS sale are taxed as short-term capital gains (higher rate).
2. Key Tax Implications of This Approach
- You Can’t Defer Taxes by Reinvesting Gains – Unlike retirement accounts, rolling gains into new LEAPS does not defer taxes.
- Holding LEAPS for Over a Year Lowers Taxes – If you sell LEAPS before 1 year, your gains are short-term (higher tax rate). If you hold LEAPS for over 1 year, you pay lower long-term capital gains tax.
- Wash Sale Rule May Apply – If you sell a LEAPS at a loss and immediately buy another similar LEAPS contract, the IRS may disallow the loss under the wash sale rule.
3. Best Tax Strategy When Rolling LEAPS
- ✅ Hold LEAPS for over a year before selling to get long-term capital gains tax rates.
- ✅ Track realized gains each year (since taxes are due on short-call income and LEAPS sales).
- ✅ Avoid wash sales when rolling LEAPS at a loss.