The Wheel Strategy is a popular options trading method that involves selling cash-secured puts to acquire stocks and then selling covered calls on those stocks. Implementing this strategy with weekly expirations can significantly impact your taxes. Below is a breakdown of how short-term capital gains (STCG), tax brackets, and other IRS rules apply when trading the Wheel weekly.
1. Short-Term Capital Gains (Higher Tax Rates)
When selling weekly options, your premium income and any stock sales within a year fall under short-term capital gains (STCG). Unlike long-term gains (taxed at a maximum of 20%), short-term gains are taxed as ordinary income at rates ranging from 10% to 37%, depending on your taxable income.
Federal Income Tax Brackets for 2024 (STCG Taxation)
| Tax Rate | Single (Taxable Income) | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | $0 – $11,600 | $0 – $23,200 | $0 – $16,550 |
| 12% | $11,601 – $47,150 | $23,201 – $94,300 | $16,551 – $63,100 |
| 22% | $47,151 – $100,525 | $94,301 – $201,050 | $63,101 – $100,500 |
| 24% | $100,526 – $191,950 | $201,051 – $383,900 | $100,501 – $191,950 |
| 32% | $191,951 – $243,725 | $383,901 – $487,450 | $191,951 – $243,700 |
| 35% | $243,726 – $609,350 | $487,451 – $731,200 | $243,701 – $609,350 |
| 37% | Above $609,350 | Above $731,200 | Above $609,350 |
Example: Tax Impact of Weekly Option Premiums
John earns $60,000 in salary.
He sells weekly covered calls and cash-secured puts, generating $5,000 in option premiums.
His total taxable income is now $65,000. This places him in the 22% tax bracket, meaning his $5,000 of STCG is taxed at 22% ($1,100 in taxes).
Scenario 1: Low-Income Earner Selling Weekly Options
Mary earns $30,000 from her job.
She makes an additional $10,000 from weekly options trading.
Total taxable income: $40,000 → Falls into the 12% bracket.
Taxes owed on options: $1,200 (12% of $10,000).
Scenario 2: High-Income Earner Running the Weekly Wheel
Robert earns $200,000 from his job.
He makes $50,000 from weekly options trading.
Total taxable income: $250,000 → Falls into the 35% bracket.
Taxes owed on options: $17,500 (35% of $50,000).
2. More Frequent Assignments & Wash Sale Rule Risks
With weekly expirations, assignments (when a stock is bought or sold due to an option being exercised) happen more often. This can trigger wash sale rules, which disallow losses if you repurchase the stock within 30 days.
Example of the Wash Sale Rule
You sell a $100 put on Apple and get assigned shares at $100.
The stock drops, and you sell your shares at $95, taking a $500 loss.
If you rebuy Apple stock within 30 days, the $500 loss is disallowed and instead added to your new cost basis.
3. Higher Taxable Income Can Trigger Additional Taxes
Selling options weekly increases taxable income, potentially triggering:
- Net Investment Income Tax (NIIT) → An extra 3.8% tax on investment income if taxable income exceeds:
- $200,000 (Single)
- $250,000 (Married Filing Jointly)
- Phase-Outs & Bracket Creep → More income from weekly options can push traders into higher tax brackets, increasing overall tax liability.
4. Tax Treatment of Covered Calls & Cash-Secured Puts
| Strategy | Tax Treatment |
|---|---|
| Covered Calls | If the option expires worthless, the premium is taxed as STCG. If assigned, gains/losses depend on the stock sale price. |
| Cash-Secured Puts | If expired worthless, premium is STCG. If assigned, the premium reduces the cost basis of the acquired stock. |
Scenario: Holding Assigned Stocks for Long-Term Benefits
Linda sells a covered call that gets assigned at a profit.
Instead of selling immediately, she holds the stock for over a year.
When she sells later, her gain is taxed at long-term capital gains rates instead of STCG.
5. Best Way to Reduce Taxes: Use Tax-Advantaged Accounts
To avoid high STCG taxes, traders can use tax-advantaged accounts, such as:
- Roth IRA → No taxes ever (best for compounding with Wheel Strategy).
- Traditional IRA / 401(k) → No taxes until withdrawal (helps defer high STCG rates).
Example: Running the Weekly Wheel in a Roth IRA means you pay zero taxes on option premiums and stock gains.
Final Thoughts
Running the Wheel Strategy with weekly expirations can generate frequent cash flow but also higher taxes due to short-term capital gains. Here's what traders need to keep in mind:
- STCG is taxed as ordinary income (10% to 37%).
- No long-term tax benefits unless stocks are held for 1+ year.
- Wash sale rules apply to frequently assigned stocks.
- Higher taxable income can trigger NIIT (3.8%) and push traders into higher brackets.
- Best way to reduce taxes? Use tax-advantaged accounts (Roth IRA, Traditional IRA, 401(k)).