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URL:  http://boards.fool.com/income-from-selling-puts-is-taxed-as-ordinary-28730953.aspx

Subject:  Re: put income and capital gains Date:  8/29/2010  11:51 PM
Author:  scanlin Number:  54 of 72

Income from selling puts is taxed as ordinary income. So if you're making $1500/month, you'll have $18K in short-term gains at the end of the year. If you're in the 30% tax bracket (for example) then you'd owe $5400 in taxes on that income.

Likewise, if you have covered call income it's the same thing -- all short term (assuming you're writing calls that are < 12 months in duration, and assuming your underlying stock is called away within 12 months of having it put to you.

As with all short-term strategies, if you can do them in a non-taxable account that's probably the way to go. You should also make sure your commission schedule is reasonable (less than $5/trade) if your volumes are small or else the commissions will become a meaningful factor in your returns.

But overall, it's a reasonable strategy, taxable or not. Many people do what you're suggesting (sell puts and then if exercised sell covered calls).

MikeS
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