Sold Call Options Tax Implications The premiums received from selling call options are classified as capital gains. If call options are bought back, the transaction generates either a short-term capital gain or loss, depending on the price paid to buy the options.

When can you sell deep in the money calls?

So, according to the IRS, options less than 90 days would be “deep” at strikes $45 and below, and options with more than 90 days would be “deep” at strikes $40 and below. The advantage of selling deep in the money calls is the safety you get with increased downside protection (intrinsic value).

Does selling covered calls affect cost basis?

Taxes, Taxes, Taxes You see, selling covered calls against a position allows you to effectively reduce the cost basis of that position. This can be very helpful if you hold the stock for a long period of time. But the higher level of activity typically generates a significant amount of short-term gains.

Is selling covered calls a good strategy?

The covered call strategy works best on stocks where you do not expect a lot of upside or downside. Like any strategy, covered call writing has advantages and disadvantages. If used with the right stock, covered calls can be a great way to reduce your average cost or generate income.

Should I sell deep in the money covered calls?

By selling a deep in the money call against a stock that you already own, you will gain time premium, but you will no doubt forfeit your stock if the stock does not go down below the strike price. If the stock price goes down but not quite to the strike price, you can buy back the contract and keep part of the premium.

Can you sell a call deep in the money?

First, buyers who like to use covered calls can sell deep in-the-money options if they are looking to get out of the stock. By selling a deep in-the-money call, it is highly likely the stock will get called away. Traders employing this strategy are not overly bullish on their stock position.

How are profits from sale of covered calls taxed?

Profits from the sale of stock, including shares called away by the exercise of sold call options are classified as capital gains. Long-term gains on stock owned for more than one year are taxed at a lower rate than short-term gains, which are taxed at your regular income tax rate.

What happens when you sell a covered call on a stock?

Stocks sold at a loss generate short- and long-term losses and can be used to offset taxable gains. If you write/sell deep in-the-money calls on stocks you have owned for more than one year, a long-term gain turns into a higher taxed short-term gain. Selling the deep in-the-money call locks in your stock gain but results in a larger tax obligation.

When do covered calls become a capital gain?

Profits and losses from covered calls are considered capital gains. Qualified covered calls generally have more than 30 days to expiration and are either out-of-the-money, at-the-money, or in-the-money by no more than one strike price. However, special rules apply to longer-dated options (options with more than 12 months to expiration).

How are profit and loss from selling call options reported?

Profits and losses are reported on your annual income tax return. The premiums received from selling call options are classified as capital gains. A gain is not realized until an option expires or is bought back with an off-setting buy order.