LEAPS (Long-Term Equity Anticipation Securities): Expirations and Tax Rules
An investor purchases a Long-Term Equity Anticipation Securities (LEAPS) call option with an expiration date 30 months from the purchase date. Which of the following statements correctly describes the characteristics and tax treatment of this LEAPS contract?
LEAPS have expirations up to 39 months. BUYERS holding LEAPS for more than 12 months qualify for long-term capital gains/losses. Writers always experience short-term treatment.
Complete Analysis & Legal Rationale
LEAPS are long-term standardized options that trade on exchanges with expirations extending up to 39 months (3 years and 3 months). Unlike standard 9-month options where all gains/losses are short-term, a BUYER of a LEAPS who holds the position for more than 12 months (one year and one day) before selling establishes a long-term holding period, qualifying for preferential long-term capital gains tax rates. Crucially, the WRITER (seller) of an option always experiences short-term capital gain or loss upon closing or expiration, regardless of holding period.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Accurately identifies up to 39-month maturity and long-term capital gains treatment for buyers holding >12 months.
Standard options have 9-month maximums; LEAPS are specifically created to extend up to 39 months.
Option writers (sellers) are ALWAYS subject to short-term capital gains tax, even on LEAPS.
LEAPS are standardized contracts issued and guaranteed by the OCC and follow all standard assignment rules.
Official Standard: Establishes that purchased options held >1 year receive long-term capital gains treatment while short option positions remain short-term.