The Two Rules
Mark to market. Under IRC §1256(a)(1) every open § 1256 position is treated as sold for fair market value on the last business day of the taxable year, and IRC §1256(a)(2) steps the basis to that mark so the same dollars are not taxed twice when you actually close. There is no wash-sale problem and no holding-period problem, because everything is settled annually by operation of law.
Sixty/forty. Under IRC §1256(a)(3), 60% of every gain or loss is long-term and 40% is short-term, regardless of how long you held the position. Eleven minutes and eleven months produce identical character. For a top-bracket taxpayer the federal blended rate is
against 37% for an equivalent short-term equity gain. Carry the stacking through honestly, because the book does so everywhere else: with the 3.8% NIIT the blend is , and a California resident adds 13.3% on top for an all-in 43.9% — versus 54.1% on the same gain earned through SPY options. The § 1256 election is worth about ten points of after-tax return on active index trading, and it is made entirely by which ticker you type.
The prescription. Trade SPX, not SPY, whenever you are taking index exposure through options. The tax difference above is the largest reason, but it is not the only one. SPX is European-style, so it cannot be assigned early and there is no pin risk at expiration. It is cash-settled, so no shares change hands and no unwanted stock position appears in your account. And one SPX contract is roughly ten times the notional of one SPY contract, which cuts your commission and spread count by an order of magnitude for the same exposure. There is no offsetting advantage to SPY options other than smaller contract size for accounts too small to trade SPX — in which case use XSP, which is one-tenth SPX and still a § 1256 contract.