Premium selling produces short-term capital gains almost exclusively. Not usually, not mostly — essentially always, and by construction rather than by accident.

That has a real effect on the strategy's after-tax return, and it is routinely left out of the comparisons people make between selling premium and simply holding an index fund.

Why the holding period never gets there

A closed option position's holding period is how long you held the option. Long-term treatment requires more than one year.

Selling 30 to 45 day contracts means every closed position has a holding period measured in weeks. There is no strike selection, no management style and no roll schedule that changes this — the durations this strategy uses are two orders of magnitude short of the threshold.

What it costs

The gap between ordinary and long-term rates is the whole issue. For a middle-bracket taxpayer it is often 10 to 17 percentage points; at higher incomes it can be wider.

Identical pre-tax performance, and the buy-and-hold outcome is 25% better after tax. A premium strategy has to out-earn a passive one by a meaningful margin before it wins on an after-tax basis in a taxable account.

The one place long-term treatment is reachable

Assigned shares. Their holding period starts at assignment and runs while you hold them — so if you hold assigned shares for more than a year before selling, that share gain does qualify for long-term treatment.

The catch is that a wheel is designed to get called away, which realises the sale well inside a year. Reaching long-term treatment on assigned shares means deliberately writing calls far enough out of the money that they do not get exercised — which reduces the premium income the strategy exists to produce.

It is a genuine trade-off rather than a free optimisation, and worth being explicit about: you are choosing between premium income and preferential rates on the share gain.

Losses are useful, at least

Short-term losses offset short-term gains dollar for dollar, which is more valuable than offsetting long-term gains. For a strategy that produces plenty of both, this genuinely softens the picture.

Net capital losses beyond gains are deductible against ordinary income only up to $3,000 a year, with the remainder carried forward. For a bad year in a concentrated options book that cap can bind, and the carryforward is worth tracking rather than forgetting.

Being honest in comparisons

When you see a premium strategy's annualised return quoted, it is pre-tax — and its tax character is the worst available. When you compare it to holding an index fund, that alternative is generating unrealised gains taxed at nothing until sale, and then at long-term rates.

This does not make premium selling a bad strategy. It means the honest comparison is after-tax, in the account you would actually use, and that comparison is a good deal less flattering than the pre-tax one. See benchmarking.

What can go wrong

Comparing pre-tax premium returns to after-tax passive returns. Apples to a different fruit entirely.

Assuming holding an option longer helps. Even a 90-day contract is nowhere near a year.

Forgetting the $3,000 cap on net loss deduction. It binds exactly in the years you most want relief.

Running a high-turnover strategy in a taxable account by default. The account choice is a bigger lever than most strike decisions.