Do I have the following correct about LEAPs and long-term gains? If I write a put option that expires in 18 months, it is a LEAP. I get the premium once the position is opened.
I close out the contract 16 months later and capture 80% of the original premium. At this point, the gain is realized and I pay long-term gains taxes. Is that correct?
Also, the government basically provided an interest free loan (premium) that was not taxed as a short-term gain?
With short option positions, if the option is closed by buying back the option to close or it expires, the result will be a short-term gain or loss. That holds true whether it's a standard option or a LEAP.
You can find mention of this at Zacks, Investopedia, in Forbes articles, etc.
Consult your accountant for verification of this.
EDIT: As for your subsequent question regarding links:
(1) FROM INVESTOPEDIA:
ii. Long-Term Equity Anticipation Securities (LEAPS®) - these are essentially long term options with terms to expiration of up to thirty nine months. The tax rules are somewhat unique in that LEAPS® writers must report short-term capital gains at expiration, irrespective of how long investors may have held the contracts. LEAPS® buyers may report long-term losses.
https://www.investopedia.com/exam-guide/cfp/characteristics/cfp31.asp
(2) FROM IRS PUBLICATION 550, Page 59:
HOLDERS OF PUTS AND CALLS
If you buy a put or a call, you may not deduct its cost. It is a capital expenditure.
If you sell the put or the call before you exercise it, the difference between its cost and the amount you receive for it is either a LONG TERM OR SHORT TERM capital gain or loss, depending on how long you held it.
WRITERS OF PUTS AND CALLS
If you write (grant) a put or a call, do not include the amount you receive for writing it in your income at the time of receipt. Carry it in a deferred account until:
Your obligation expires;
You buy, in the case of a put, or sell, in the case of a call, the underlying stock when the option is exercised; or
You engage in a closing transaction.
If your obligation expires, the amount you received for writing the call or put is SHORT TERM capital gain...
If you enter into a closing transaction by paying an amount equal to the value of the put or call at the time of the payment, the difference between the amount you pay and the amount you receive for the put or call is a SHORT-TERM capital gain or loss.
Note that IRS info for HOLDERS OF PUTS AND CALLS says LONG TERM OR SHORT TERM and that for WRITERS OF PUTS AND CALLS it only says only SHORT TERM.
Per Publication 550 and based strictly on the wording of your question, it is a short term gain. The quote from the IRS is
if you enter into a closing transaction by paying an amount equal to the value of the put or call at the time of the payment, the difference between the amount you pay and the amount you receive for the put or call is a short-term capital gain or loss.
See Pub 550 page 59-60.
This is not true if this transaction was a part of another transaction, such as a straddle, or a handful of other types of transactions such as wash sales.
