A LEAP (long-term equity anticipation security) is a call or put option that allows the buyer a long-term expiration on the option to buy or sell shares of stock at a set price, called the strike price. Expiration dates on LEAPs can range from nine months to three years, making them a more long-term holding than a traditional call option.
Because of their long-term nature, existing LEAPs are often sold by the very investors who originally purchased the contracts. When LEAPs are sold at a profit, the gain is taxable. The seller of the LEAP will be taxed at long-term capital gains rates if they held the contract for at least a year and a day. If they held the contract for less time, they would be subject to short-term capital gains rates.

Selling a LEAP option contract is not the only way that an investor can face tax consequences within this transaction. An investor who exercises his LEAP call option and then sells the shares of stock immediately would be subject to short-term capital gains rates even if he had held the LEAP contract for more than 12 months. Once a LEAP call option is exercised, the investor must then hold the shares of stock for more than 12 months from the date the contract is exercised in order to pay long-term capital gains tax rates. For a put, the investor who sells the stock at the LEAP's strike price and subsequently makes a profit would pay capital gains tax based on the amount of time he owned the actual shares, without regard to the length of time he held the contract.

  1. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
  2. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  3. How can I profit with call options?

    Learn what a call option and a long call strategy are, how to speculate stock price increases using a call option and how ... Read Answer >>
  4. What happens when a security reaches its strike price?

    Learn more about the moneyness of stock options and what happens when the underlying security's price reaches the option ... Read Answer >>
  5. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
  6. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
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