Abstract Inspired by the experimental finding of a paramagnetic insulating state in rhombohedral LiNiO2, a lithium-ion battery cathode of great interest, we calculate the electronic, magnetic, and optical properties of LiNiO2 employing a range of single-particle and many-body methods. Within density-functional theory (DFT) using the generalized-gradient approximation (GGA), meta-GGA, and hybrid functionals, we obtain a ferromagnetic half-metallic ground state for rhombohedral LiNiO2, as has been seen previously. Self-consistent GW calculations including self-interaction corrections beyond DFT for various flavours show an electronic band gap albeit with a small quasiparticle peak at the Fermi energy. Moving beyond this, room temperature state-of-the-art dynamical mean-field theory (DMFT) calculations on rhombohedral LiNiO2 show for the first time a gap of combined Mott and charge-transfer character. The paramagnetic insulating state has a band gap of ~0.6 eV, in excellent agreement with experiments and is in sharp contrast to DFT calculations that require the presence of an extra structural symmetry breaking in the form of Jahn–Teller distortions to open a gap. We observe Ni to be in a +2 state in a d 8L configuration, with a charge-transfer ligand hole in O p, and identify the ligand hole state from the DMFT DOS. We further show that whereas DFT shows the presence of an unphysical metallic Drude peak in the optical absorption spectra, DMFT calculations capture the correct form of the optical absorption spectra, and have an excellent match with the calculated band gap as well. Our results clarify that at room temperature, it is the charge transfer gap with a Mott character that causes rhombohedral LiNiO2’s insulating nature; a structural distortion is not required.