SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Tax Efficient Trading Part II: Capital Gains Deferral

In part I I illustrated how the preferential tax treatment of 1256 contracts could improve after tax returns of a PutWrite strategy over a long period of time. In this article, I’ll continue the illustration by switching from a PutWrite to an ETF BuyWrite (covered calls) strategy while holding pre-tax expected returns constant at 8%.

I’ll also continue to assume a 32% tax rate for short term gains and 15% for long term gains.


Writing puts on 1256 option contracts makes 60% of the gains Long Term Capital Gains, but those gains are fully taxable every year. This makes an 8% pre-tax return a 6.26% after-tax return. With an ETF BuyWrite strategy, most of the yearly profits will be unrealized in the form of share price appreciation. On an annual basis, I’m assuming the 8% return would be composed of:

  • ETF dividend yield: 1.5%
  • Short call option realized gains: 0.5%
  • Unrealized share price apperception: 6%


If we assume 80% of the dividend yield is qualified dividends, and the call option gains are 1256 contracts, the annual after-tax return falls from 8% to 7.61%. Updating the chart from the Part I article comparing all three strategies, we see the following differences in long term after-tax performance:





This illustration shows how taxes are a very important long-term consideration in a taxable brokerage account. While the results of all three strategies would be the same in a retirement account, they are very different in a taxable account. An ETF BuyWrite strategy has the advantage of deferring taxes on share price appreciation until shares are sold, which the investor has full control over. An investor can also tax loss harvest shares when unrealized losses exist by swapping from one ETF into another that is similar but not identical, booking a capital loss deduction.

After 30 days have passed, the investor is free to switch back to the preferred ETF. Investors who make charitable donations can gift highly appreciated shares instead of cash, then using the available cash to repurchase donated shares. The net result is an increased average price per share and lower future capital gains liabilities when shares need to be sold to meet financial obligations.


In retirement an investor could use dividends, gains from calls, and sales of shares to meet their spending needs. Even if the investor were to fully liquidate the portfolio at the end of year 30 the after-tax amount would still be $831,622, well in excess of either PutWrite strategy. Since ETF’s can be used as collateral for a margin loan, an investor could also take tax free margin loans instead of selling shares to continue deferring unrealized capital gains. Under current US tax law, unrealized capital gains would effectively be erased at death due to receiving a step up in cost basis.


Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University.

Related articles:


What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles


  • Q&A with Mental Game Coach Jared Tendler

    QUESTION: Thank you for taking the time to participate in a Q & A session with Steady Option. Let’s start with an introduction and a little bit of background on who you are and how you got here.

    By Jared Tendler,

  • Using TLT Options to Increase Expected Returns of a Buy & Hold Portfolio

    TLT is the iShares 20+ Year Treasury Bond ETF that seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years. Even though US Treasuries typically act as a diversifying asset class to mainstream equities, many investors with long time horizons may not be interested in holding TLT in their portfolio because it would lower expected returns.

    By Jesse,

  • Tax Efficient Trading Part II: Capital Gains Deferral

    In part I I illustrated how the preferential tax treatment of 1256 contracts could improve after tax returns of a PutWrite strategy over a long period of time. In this article, I’ll continue the illustration by switching from a PutWrite to an ETF BuyWrite (covered calls) strategy while holding pre-tax expected returns constant at 8%.

    By Jesse,

  • Tax Efficient Trading Part I: The 1256 Contracts

    Cash settled index options like SPX, XSP, RUT and a few others receive special federal tax treatment where 60% of the gains are reported as a Long Term Capital Gain (LTCG) even if the contract was held for less than a year.

    By Jesse,

  • SPY Short Puts vs. Put Spreads

    In this article I’ll be using the ORATS Wheel backtesting tool to compare the performance since 2007 of SPY short puts versus short put spreads. I’ll look at both risk and returns, and different ways of determining position size to adjust for the differences in risk between the two trades.

    By Jesse,

    • 1 comment
  • Signs that you Are Ready to Start Investing

    If you want to build your wealth, you have to make sure that you invest your money. If you put money into a savings account and don’t earn any interest from it, this won’t work for you in the long term. Your money will lose value because of inflation, and this is the last thing that you need. So when do you invest?

    By Kim,

  • One Year of Diversified leveraged Anchor

    I almost hate to keep saying it, but the Diversified Leveraged Anchor strategy keeps exceeding expectations and performing as designed. To remind our readers, Diversified Leveraged Anchor was created in April 2020 attempting to further increase performance, reduce risk, and to reduce volatility. 

    By cwelsh,

  • Should I Pay Off My Mortgage Early Or Invest?

    Paying off a home mortgage early is a popular financial goal. Most people feel a level financial peace when their home is paid off that is beneficial in many ways. The most common approach to paying off the mortgage early is directly making additional principal payments to the lender on a regular basis.

    By Jesse,

  • Option Order Execution Tips

    As a community of option traders, we all can relate to the occasional challenges of order execution. Best practices for avoiding errors as well as techniques for better potential execution will be the focus of this article.  Like countless others in the Steady Options community, I personally have traded thousands of option contracts over the last decade.

    By Jesse,

  • What Trading Can Offer To A Newcomer

    For any first-time investor, one of the most important questions to ask is “why are you doing this?”. Getting into investment can be thrilling and open up new worlds for you, but it can also be draining both physically and emotionally, with long days and sudden market moves always a genuine risk.

    By Kim,


  Report Article

We want to hear from you!

There are no comments to display.

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

Options Trading Blogs Expertido