The Complete Guide to Using a Self-Directed IRA for Options Trading in 2026

Options are powerful financial instruments that give investors the right, but not the obligation, to buy or sell a security at a predetermined price by a specified date. For years, options trading has been associated with taxable brokerage accounts. But more and more sophisticated investors want to use options inside their retirement accounts.

A Self-Directed IRA gives you that flexibility. It allows you to trade options while preserving the tax advantages of a retirement plan, but only if the transactions are structured and understood properly.

As of 2026, the tax treatment of options inside an SDIRA is still governed by longstanding IRS rules, including language from IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations. That publication provides important legal context for what is and is not treated as taxable income for retirement entities. If you do not understand these rules, you can easily run into unintended tax consequences, especially Unrelated Business Taxable Income (UBTI) and Unrelated Debt-Financed Income (UDFI).

In this article, I am going to walk you through the basics of options, how they can be used inside a Self-Directed IRA in 2026, and the current IRS legal foundation for their taxation, including the key exclusions retirement investors need to understand.

What Are Options? A Quick Recap

An option is a contract that gives the holder the right to buy, which is a call option, or sell, which is a put option, an underlying security at a specified strike price before or at the expiration date.

There are several key differences between options and simply owning stock:

• Defined risk and leverage. Options can magnify returns or limit risk to the premium paid.
• Expiration dates. Options have finite lifespans, unlike stocks.
• Multiple strategies. These include covered calls, protective puts, spreads, and straddles.

Because options are derivatives, meaning their value is derived from an underlying asset, their tax treatment can be more complex than direct stock trades. That complexity increases when you use them inside a tax-advantaged account like an SDIRA.

Can You Trade Options in a Self-Directed IRA? Yes, But There Are Rules

The IRS does permit options trading in retirement accounts, including Self-Directed IRAs, as long as the activity does not create prohibited transactions or generate unrelated business taxable income without justification.

Here is what that means in practical terms:

• Buying puts or calls is generally acceptable, as long as the underlying investment and the trade are consistent with IRA purposes and do not involve prohibited self-dealing.
• Writing covered calls is a common strategy for income-oriented IRA investors.
• More complex multi-leg strategies can trigger technical tax issues and should be analyzed carefully.

Where investors get tripped up is not in placing the trade. It is in understanding how the IRS treats the gains and losses, especially when options are tied to business operations or involve leverage.

UBTI and Options: What IRS Publication 598 Says

If you are going to trade options inside a Self-Directed IRA, you need to start with the IRS’s own guidance. IRS Publication 598 governs the tax on unrelated business taxable income for exempt organizations, including certain retirement entities. It includes language that is directly relevant to options:

“Lapse or termination of options. Any gain from the lapse or termination of options to buy or sell securities is excluded from UBTI. The exclusion applies only if the option is written in connection with the exempt organization’s investment activities.”

IRS Publication 598 (2026), Section 3, Unrelated Business Taxable Income Exceptions

This language gives us an important legal foundation. It tells us how option transactions tied directly to investment activities should be treated, even inside a retirement account.

Key Principle:

If an option expires or is terminated and it is tied to investment activities, any gain from that lapse is not treated as UBTI. In other words, it is not taxable as unrelated business income.

However, this exclusion does not apply if options are held as inventory or as part of an ongoing trade or business.

For most Self-Directed IRAs, which are not engaged in a regular trade or business, this means:

• Gains from expired or lapsed options tied to investment activities are not considered UBTI.
• Options must be held in an investment context, not as part of an operating business.
• Business-style option writing or highly structured trading activity may require deeper analysis to avoid adverse tax consequences.

How Different Options Transactions Are Treated in 2026

1. Buying Options, Calls or Puts

Tax treatment. Gains or losses realized when you sell or exercise the option stay inside the retirement account and are not taxable in the year of the transaction.

UBTI risk. Generally none, unless the option is part of a business activity or financed with debt.

2. Covered Call Writing

A covered call involves owning the underlying security and selling a call option against it to generate income.

Under IRS Publication 598, if covered calls are part of investment activities, gains from expiration or termination are excluded from UBTI.

Tax implication. Covered call premiums and related outcomes remain tax-advantaged inside the SDIRA.

3. Protective Puts

Buying protective puts to hedge downside risk does not generate UBTI and is treated as an investment transaction.

Any gains or losses flow back into the SDIRA without annual taxation.

4. Spreads, Straddles, and More Complex Structures

These strategies involve multiple legs and can create more complicated tax questions. If they begin to resemble a business-type trading operation rather than passive investment activity, there is potential risk.

In those situations, it is smart to consult tax counsel who understands retirement plan rules.

When UBTI or UDFI Can Apply

While many standard options trades do not trigger UBTI, there are situations where unrelated business taxable income can arise inside an SDIRA.

Debt-Financed Investments

If your SDIRA uses leverage, including margin or certain structured arrangements, to acquire stocks or options, you may generate Unrelated Debt-Financed Income, which is a subset of UBTI. That can create a tax liability inside the IRA.

Business-Like Option Activities

If options are treated as inventory or used as part of a regular business, the gains may not qualify for the lapse exclusion in Publication 598 and could be treated as UBTI.

Futures, Commodities, and Non-Security Derivatives

Certain futures contracts and non-security derivatives are treated differently than listed stock options and may generate UBTI unless another exclusion applies. These are advanced areas and require professional review before implementation.

Practical Steps for Options Trading in a Self-Directed IRA in 2026

1. Verify Your Plan Language
   Make sure your Self-Directed IRA plan documents explicitly permit options and derivative activity.
2. Use a Qualified SDIRA Custodian
   Work with a custodian that understands alternative assets and options execution. Proper execution and reporting matter.
3. Document the Investment Purpose
   Keep clear records showing that your options activity is investment-oriented and not part of an operating business. Document expiration, exercise, and sale events.
4. Monitor for UBTI Triggers
   Before entering complex strategies or using leverage, evaluate the potential for UBTI or UDFI with a retirement tax professional.
5. Seek Professional Tax Guidance
   Options are nuanced. Their tax treatment can vary based on structure and intent. For advanced strategies, you want counsel that understands retirement plans and derivative taxation.

Why the Legal Foundation Matters

One of the most valuable aspects of IRS Publication 598 is the lapse exclusion. Although the publication is written primarily for exempt organizations, its rules regarding when gains are excluded from UBTI provide a clear legal framework for retirement accounts. That guidance remains authoritative in 2026.

When you anchor your strategy to actual IRS guidance, not informal commentary, you put yourself in a much stronger position. As I always tell clients, compliance is not about guessing. It is about building on solid legal footing.

Advantages of Using a Self-Directed IRA to Invest in Options

One of the biggest advantages of using a Self-Directed IRA to invest in options is the ability to implement sophisticated trading and risk management strategies without the annual tax friction you would face in a taxable brokerage account. Inside an SDIRA, option premiums, gains from exercised or closed positions, and income generated from covered call strategies can compound on a tax-deferred or tax-free basis, depending on whether the account is Traditional or Roth.

That structure matters. It allows you to rebalance, hedge, and generate income using options without triggering short-term capital gains taxes, which can be especially punitive for frequent or income-oriented strategies. In addition, Self-Directed IRAs give you the flexibility to pair options strategies with a broader range of investments, such as individual equities, ETFs, and alternative assets, while maintaining IRS compliant ownership and reporting.

When properly structured, an SDIRA allows you to use options not as speculative tools, but as disciplined components of a long-term retirement strategy built around risk control, income generation, and tax-efficient growth.

Conclusion: Options Can Be Part of a Thoughtful SDIRA Strategy If Done Right

Options present a compelling way to enhance yield, hedge risk, and participate in more sophisticated market strategies within a Self-Directed IRA. Thanks to IRS guidance, particularly the lapse exclusion in Publication 598, many common options transactions can be executed inside retirement accounts without triggering annual tax liabilities such as UBTI.

That said, executing options inside an SDIRA is not simple. Understanding when an option gain is excluded from UBTI, when UDFI can apply, and how a specific strategy is interpreted for tax purposes requires careful planning and specialized expertise.

If you want to incorporate options into your long-term retirement strategy, working with a custodian and tax advisors who specialize in alternative asset IRAs and understand the current IRS rules is essential. With the right structure and professional support, Self-Directed IRA options investing can be both powerful and compliant in 2026.