Everything in the taxes track so far has assumed equity options, where premium selling produces short-term gains at ordinary rates. There is a category that does not work that way, and for some premium sellers it is the single largest available tax improvement.

The 60/40 rule

Section 1256 contracts get a fixed split regardless of how long you held them.

For a strategy that otherwise produces 100% short-term gains, that is a substantial improvement. A trader at a 32% ordinary rate and a 15% long-term rate sees a blended rate of roughly 22% instead of 32% — a third off the tax bill for doing nothing differently except choosing a different underlying.

What qualifies

The category that matters for premium sellers is broad-based index options. Options on major market indices generally qualify; options on individual stocks and on ETFs that hold securities generally do not.

That distinction is sharper than it looks. An option on a broad market index is typically a 1256 contract. An option on an ETF that tracks the same index typically is not, because the ETF is a security and its options are equity options.

Two products tracking the same underlying market, two different tax treatments. It is the detail most likely to catch someone out, and it is worth verifying for the specific product you trade rather than assuming from the name.

The loss carryback

A second feature worth knowing: net Section 1256 losses can generally be carried back up to three years against prior Section 1256 gains, rather than only carried forward.

For a strategy that has good years and occasional bad ones, that is more useful than the ordinary capital loss rules, where you carry forward and deduct only $3,000 a year against ordinary income.

Does this change the strategy?

For a classic wheel, no — and it is worth being clear about why. The wheel depends on assignment into shares, and broad-based index options are cash-settled. There are no shares to be assigned, so there is nothing to write covered calls against.

Index options suit a different shape of premium selling: cash-settled credit spreads, iron condors and strangles where you never intend to take delivery. If your strategy is condors on an index, the tax treatment is a real advantage. If it is a wheel, this lesson is background rather than an opportunity.

There is a middle path some traders take: run the wheel on individual names for the assignment mechanic, and run index condors alongside for the tax-favoured portion. That is a deliberate structural choice, not a tweak.

Reporting differs too

Section 1256 contracts are reported in aggregate on a different form from ordinary capital transactions, and brokers typically report the year's aggregate profit or loss rather than a line per trade.

That makes them easier to file and harder to reconcile against your own records — you get one number rather than a transaction list. Worth knowing before you go looking for the detail that is not there. See reconciling the 1099-B.

What can go wrong

Assuming an index ETF's options qualify. Generally they do not; options on the index itself generally do.

Being surprised by year-end mark to market. Tax on an unrealised gain is a cash-flow event.

Trying to wheel a cash-settled contract. There is nothing to be assigned.

Choosing an underlying for tax reasons alone. Liquidity, strategy fit and your own understanding come first.