A LEAP (long-term equity anticipation security) is a call or put option that allows the holder to buy or sell shares of stock at a set strike price. Expiration dates on LEAPs can range from nine months to three years, which is longer than the holding period for a traditional call or put option. Because of their long-term nature, LEAPs are often sold by the same investor who originally purchased the contracts. When LEAPs are sold at a profit, the gain is taxable. The seller of the LEAP is taxed at the long-term capital gain rate if they held the contract for at least a year and a day. If they held the contract for a shorter period, they would be subject to short-term capital gains rates.
Selling a LEAP option contract is not the only way that an investor can incur tax consequences with this instrument. An investor who exercises a LEAP call option and then sells the stock purchased immediately would be subject to short-term capital gains rates even if he or she had held the LEAP contract for more than 12 months. Once a LEAP call option is exercised, the investor must hold the stock purchased for more than 12 months from the exercise date in order to qualify for the long-term capital gains tax rate. 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.