If a LEAP option is purchased and held for more than 12 months, is the tax treatment long term?

By Yolander Prinzel AAA
A:

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.

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