Are Covered Calls Taxed?

Yes, covered call premiums are taxed as short-term capital gains, regardless of how long you've held the stock. Here's what you need to know:

How Covered Calls Are Taxed

Premium Received

  • Taxed as short-term capital gain when option expires or is closed
  • Tax rate: Your ordinary income rate (10-37%)

    • If Shares Are Called Away

  • Premium added to sale price
  • Holding period of stock determines short vs. long-term

    • Tax Example

    You owned AAPL for 2 years (long-term):

  • Bought at $150, now $230
  • Sell $240 covered call for $5
  • Stock called away at $240

    • Tax treatment:

  • Stock gain: $240 - $150 = $90 (LONG-TERM rate)
  • Premium: $5 (SHORT-TERM rate)
  • Total: $95 gain per share

    • The Qualified Covered Call Exception

    If your covered call is "qualified," it doesn't reset your holding period. A covered call is qualified if:

  • Strike ≥ lowest qualified strike price (IRS tables)
  • Expiration ≤ 12 months
  • Not "deep in the money"

    • Tax-Advantaged Accounts

    Sell covered calls in Roth IRA or Traditional IRA to avoid annual taxation. All gains grow tax-free or tax-deferred.

    Record Keeping

    Track for each trade:

  • Date opened/closed
  • Premium received
  • Stock cost basis
  • Assignment details