Cover Call Premium Tax Question

[ownyourfuture]

I've sold plenty of covered calls over the years, but with this one, the premiums are huge & that could cause major tax implications.

As I understand it, if I sell a covered call with an expiration date of December 19, 2025, the premium received only becomes taxable when..........


A: The option expires worthless.
B: Is closed with a closing purchase transaction.
*C: When/if shares are called away/assigned.


*I'm aware that I'd also be responsible for capital gains on the underlying shares at the time of the sale.

 

[jldavid47]

I've sold plenty of covered calls over the years, but with this one, the premiums are huge & that could cause major tax implications.

As I understand it, if I sell a covered call with an expiration date of December 19, 2025, the premium received only becomes taxable if/when..........

A: The option expires worthless.
B: Is closed with a closing purchase transaction.
*C: When/if shares are called away/assigned.

*I'm aware that I'd also be responsible for capital gains on the underlying shares at the time of the sale.

Yes.

(A) You have a long-term capital gain that is taxable in 2025
(B) You have a capital gain or loss depending on whether you made or lost money on the option. If you close it in 2024, it's taxable in 2024. If you close it in 2025, it's taxable in 2025.
(C) The cost basis of the shares is adjusted for the amount of the option premium and you have a capital gain or loss depending on whether you made or lost money after adjusting the basis of the stock.

Example of (C): You bought XYZ at $40 and sold a $45 call for $2. If assigned, the cost basis of XYZ is adjusted to $38 and you have a $7 capital gain on the stock. You never report the option on schedule D in this case.

 

[jim584672]

Unless it is a Section 1256 contract which gets marked to market at end of year.

 

[ownyourfuture]

Thanks for the replies.
I had to research section 1256.
https://www.investopedia.com/terms/s/section-1256-contract.asp
As far as I can tell, this wouldn't apply to me.

FYI: The stock in question is Eli Lilly & the capital gains would be (for lack of a better word) gargantuan. A very nice problem to have.

The reason I'm considering this, is that the option premiums are insanely high at the moment, & the 350 shares now represent almost 23% of the account.

 

[RobLJ]

Thanks for the replies.
I had to research section 1256.
https://www.investopedia.com/terms/s/section-1256-contract.asp
As far as I can tell, this wouldn't apply to me.

FYI: The stock in question is Eli Lilly & the capital gains would be (for lack of a better word) gargantuan. A very nice problem to have.

The reason I'm considering this, is that the option premiums are insanely high at the moment, & the 350 shares now represent almost 23% of the account.

I suspect the reason (or part of it) is that stock price on Lilly and Novo-Nordisk both exploded up, with the consequent volatility, due to demand for their weightloss drugs. I've considered a stop loss on Novo, since I'm currently up a bit more than 400% in 6 years, which is a bit insane. I have sold 1/3 of the position, and am now playing poker with house money.

 

[Texas Proud]

Just curious... how to you sell a covered call?


I have some stock that I could do this and if called not worry about it... might be a way to make a little on the side....

 

[ownyourfuture]

I suspect the reason (or part of it) is that stock price on Lilly and Novo-Nordisk both exploded up, with the consequent volatility, due to demand for their weightloss drugs. I've considered a stop loss on Novo, since I'm currently up a bit more than 400% in 6 years, which is a bit insane. I have sold 1/3 of the position, and am now playing poker with house money.

Sounds like a smart play. I purchased my shares of Lilly in 2011. The last 6 or 7 years have been as you say, a bit insane. The January 17, 2025 strike price is $940.00 & the premium was $26.10. Hate to see 100 shares of a company that played a major role in my being able to get out of the rat race at age 53, possibly called away, but at that point those 350 shares would = around 30% of the total portfolio.

Regards

 

[ownyourfuture]

Another tax question related to options:

Sold 5 covered calls on an ETF about a month ago. The expiration date would've been tomorrow, but my gut told me to buy them back this past Tuesday.

That turned out to be the right call, as it looks like the shares would've been called away at approximately $4 above the strike price.

Buying to close on Tuesday resulted in a loss of a little over $100 on the transaction.

I was considering selling covered calls again today, so I'm wondering if wash sale rules also apply to this situation/transaction ?

Thanks in advance.

 

[joesxm3]

https://fairmark.com/investment-taxation/capital-gain/wash/wash-sales-and-options/

Maybe this wi!l help.

 

[ownyourfuture]

https://fairmark.com/investment-taxation/capital-gain/wash/wash-sales-and-options/

Maybe this wi!l help.

Thank you. Unfortunately, I had already found that page.
The closest example they give relating to my situation is the third paragraph up from the bottom.

Suppose you’ve sold a call option at a loss. Buying another call option on the same stock within the wash sale period may be viewed as a wash sale even if the new call option has a different expiration or a different strike price. The IRS might assert that you have a wash sale if you buy XYZ stock, especially if the call was in the money when you sold it. Similarly, you could also have a wash sale if you write a deep-in-the-money put option during the wash sale period.

I'll have to give Fidelity a call Monday.
Regards

 

[tutan]

Just curious... how to you sell a covered call?


I have some stock that I could do this and if called not worry about it... might be a way to make a little on the side....

First, you’ll have to apply and get approved for options trading on your brokerage website
Once approved, you will be able to access options trading..for example on Fidelity and Etrade, click on the stock you wish to sell a covered call. It should show a “options chain” which will open up to sections of future expiry dates, each containing different strike prices and the option premium bid/ask for each strike. Pick one to set the limit to sell.

 

[ownyourfuture]

Another tax question related to options:

Sold 5 covered calls on an ETF about a month ago. The expiration date would've been tomorrow, but my gut told me to buy them back this past Tuesday.

That turned out to be the right call, as it looks like the shares would've been called away at approximately $4 above the strike price.

Buying to close on Tuesday resulted in a loss of a little over $100 on the transaction.

I was considering selling covered calls again today, so I'm wondering if wash sale rules also apply to this situation/transaction ?

Thanks in advance.

1st a correction regarding the sentence highlighted above.
The strike price was $38. Shares closed at around $42 on the expiration date & would have been called away @ $38.

Spoke to a Fidelity representative this past week & found that it would be a wash sale if I sold covered calls before 30 days had elapsed.