Stocks. Options. ETFs. Dividends. Understand how the IRS taxes every instrument you trade — clearly, without jargon.
⚠ This guide is educational only — not tax, legal, or financial advice. Consult a licensed CPA.
Every instrument has its own tax treatment. Knowing the difference can save you thousands — or prevent a costly surprise at filing time.
Buy and sell equities. Short-term gains (held ≤ 1 year) taxed as ordinary income; long-term gains (held > 1 year) get preferential rates.
Up to 37% STCGPuts and calls on individual stocks. Premiums, exercises, and expirations each have unique tax consequences tied to the underlying.
Up to 37% STCGSPX, RUT, and other broad-based index options benefit from the Section 1256 60/40 rule regardless of holding period.
60/40 BlendedTax treatment varies by structure — equity ETFs follow stock rules, commodity ETFs may face 28% collectibles rates, bond ETFs generate ordinary income.
Varies by TypeQualified dividends taxed at preferential 0–20% rates. Ordinary dividends taxed at your marginal rate up to 37%.
0–20% QualifiedRegulated futures contracts get Section 1256 treatment — 60% long-term / 40% short-term — and are marked to market at year-end.
60/40 BlendedThe holding period is everything. One extra day can cut your tax rate nearly in half.
| Taxable Income | Rate |
|---|---|
| $0 – $11,600 | 10% |
| $11,601 – $47,150 | 12% |
| $47,151 – $100,525 | 22% |
| $100,526 – $191,950 | 24% |
| $191,951 – $243,725 | 32% |
| $243,726 – $609,350 | 35% |
| $609,351+ | 37% |
| Taxable Income | Rate |
|---|---|
| $0 – $47,025 | 0% |
| $47,026 – $518,900 | 15% |
| $518,901+ | 20% |
2024 single-filer brackets shown. Married filing jointly thresholds are approximately double.
To qualify for long-term capital gains rates, you must hold the asset for more than one year — that means at least 366 days. Selling on day 365 means the gain is taxed as ordinary income.
If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married), an additional 3.8% Net Investment Income Tax applies to all capital gains, dividends, and other investment income.
Most states tax capital gains as ordinary income. California adds up to 13.3%. Texas, Florida, and Nevada have no state income tax — a major advantage for active traders.
Options taxation depends on the type of option, whether it was exercised, and the underlying asset. Here's how each scenario breaks down.
Puts and calls on individual stocks are always short-term capital gains/losses when closed, regardless of how long you held the contract.
STCG — Ordinary RateLong-term equity anticipation securities held for more than 12 months before selling may qualify for long-term capital gains treatment.
LTCG PossibleSPX, NDX, RUT, and VIX options are Section 1256 contracts — automatically taxed 60% long-term, 40% short-term regardless of holding period.
~26.8% EffectiveSection 1256 contracts — including index options and regulated futures — receive a blended tax treatment regardless of your actual holding period. 60% of gains are taxed at the long-term rate (max 20%), while 40% are taxed at your ordinary income rate (max 37%).
For a trader in the highest bracket, this creates an effective rate of approximately 26.8% compared to 37% for short-term equity options — a savings of over 10 percentage points on every dollar of gain.
SECTION 1256 TAX SPLIT
When you exercise an option instead of closing it, the premium paid or received is rolled into the cost basis of the underlying stock. The option itself generates no separate gain or loss — the tax event occurs when you eventually sell the shares. This can significantly change your holding period and tax rate.
ETFs are not all taxed the same. The underlying assets determine whether you face standard capital gains, ordinary income, or the collectibles rate.
Follow standard stock STCG/LTCG rules. The creation/redemption mechanism makes equity ETFs highly tax-efficient — most don't distribute capital gains to shareholders, unlike mutual funds.
STCG up to 37% · LTCG 0–20%
Interest distributions are taxed as ordinary income at your marginal rate. Capital gains from selling shares follow standard STCG/LTCG rules. Consider holding bond ETFs in tax-advantaged accounts (IRA, 401k) to defer the ordinary income hit.
Interest at ordinary rates · Best in IRA/401k
Physically-backed commodity ETFs like GLD are structured as trusts. The IRS treats gains as collectibles, subject to a maximum 28% long-term rate — higher than the standard 20% LTCG cap. Futures-based commodity ETFs may get Section 1256 treatment instead.
⚠ Collectibles rate: max 28% LTCG
Foreign taxes withheld on dividends may qualify for the Foreign Tax Credit (Form 1116), which offsets your U.S. tax liability dollar for dollar. Tax treaties with some countries reduce withholding rates. Gains follow standard STCG/LTCG rules.
Foreign Tax Credit offsets withholding
Not all dividends are created equal. Qualified dividends get preferential rates; ordinary dividends are taxed as income.
The 121-day window starts 60 days before the ex-dividend date and ends 60 days after. Buying the day before ex-div and selling the day after does NOT qualify.
REITs must distribute 90%+ of taxable income, but these distributions are almost always ordinary income — not qualified. The 20% QBI deduction (Section 199A) may partially offset this for some filers.
The IRS disallows a loss deduction if you buy a "substantially identical" security within 30 days before or after the sale at a loss. The disallowed loss is added to your cost basis in the replacement shares.
If you sell a stock at a loss and repurchase the same (or substantially identical) security within the 61-day window — 30 days before through 30 days after the sale — the IRS disallows the loss for that tax year.
The disallowed loss isn't gone forever. It gets added to the cost basis of the replacement shares, which means you'll eventually recognize that loss when you sell the replacement shares — as long as you don't trigger another wash sale.
The rule applies across all your accounts — brokerage, IRA, Roth IRA, and even your spouse's accounts if you file jointly. Buying in an IRA within the window is especially dangerous because the disallowed loss may be permanently lost (no future cost basis adjustment).
THE 61-DAY WASH SALE WINDOW
Any repurchase of a "substantially identical" security within this window disallows the loss.
EXAMPLE
Selling at a loss in your brokerage and buying the same stock in your IRA within 30 days triggers a wash sale — and the disallowed loss is permanently lost because IRA shares have no cost basis.
Buying a call option on a stock you just sold at a loss can trigger the wash sale rule if the option is deemed "substantially identical." Deep in-the-money calls are especially risky.
Sell SPY at a loss and buy VOO (or vice versa) — both track the S&P 500 but are not "substantially identical" per IRS guidance. This harvests the loss while maintaining market exposure.
Your broker generates some of these automatically. Others you must file yourself. Know what each form does so nothing falls through the cracks.
Legal strategies to reduce your tax burden. Every dollar saved on taxes is a dollar that compounds in your portfolio. ⚠ Consult a CPA before implementing any of these strategies.
Sell losing positions to offset gains, then reinvest in a similar (not identical) asset to maintain exposure. Net losses up to $3,000 can offset ordinary income.
Qualify as a "trader" in the eyes of the IRS to deduct trading-related expenses on Schedule C. Requires frequent, regular, and substantial trading activity with the intent to profit from short-term price swings.
Elect to mark all positions to market at year-end. Converts all gains/losses to ordinary income — eliminates wash sale headaches and removes the $3,000 capital loss limitation.
Trade inside a Roth IRA for tax-free gains, or a Traditional IRA for tax-deferred growth. No capital gains tax, no wash sale tracking. The tradeoff: contribution limits and withdrawal restrictions.
Time your sells to cross the 1-year threshold. The rate difference between 37% STCG and 15% LTCG on a $50,000 gain is $11,000 — worth waiting a few extra days in many cases.
If you expect to owe $1,000+ in taxes, the IRS requires quarterly estimated payments (1040-ES). Missing payments triggers underpayment penalties — currently ~8% annualized. Use the safe harbor rule: pay 110% of last year's tax.
High-volume traders may benefit from trading through an LLC or S-Corp. S-Corps can reduce self-employment tax by splitting income between salary and distributions. Requires TTS qualification first.
If you're a short-term trader, consider SPX options or /ES futures instead of SPY options. The 60/40 split saves over 10 percentage points on every dollar compared to ordinary short-term rates.
The PDT rule isn't a tax rule — it's a FINRA regulation. But it directly shapes how most traders execute, which in turn affects their tax outcomes.
FINRA Rule 4210
Pattern day traders must maintain at least $25,000 in equity in their margin account at all times. Falling below locks your account to closing-only trades.
PDT accounts receive up to 4× day-trading buying power (vs 2× for regular margin). This leverage amplifies both gains and losses.
Day trading gains are always short-term. In the highest bracket, you keep only 63 cents of every dollar gained — before state taxes.
Execute 4 or more day trades within any rolling 5-business-day period and your account is flagged as PDT. The label sticks for 90 days.
DAY TRADING $80,000 GAIN
Federal tax @ 37%
You keep: $50,400
LONG-TERM $80,000 GAIN
Federal tax @ 15%
You keep: $68,000
DIFFERENCE
More in your pocket with LTCG
Before you file, make sure you've discussed these topics with a qualified tax professional: