How Is the Tax Character of a Gain Determined for a Cash-Settled Option?

The tax character of a gain from a cash-settled option depends on the holding period of the option contract itself. If the option is held for one year or less, the gain is considered short-term capital gain, taxed at ordinary income rates.

If held for more than one year, it is a long-term capital gain, taxed at lower preferential rates. The underlying asset's holding period or its delivery status is generally irrelevant for determining the option's character.