Covered Call Tax Treatment

Understanding covered call taxation helps you make better decisions and avoid surprises.

Basic Tax Rules

Premium Received

  • Taxed as short-term capital gain
  • Regardless of how long you've held the stock
  • Reported in year option closes/expires

    • If Option Expires Worthless

  • Premium is short-term capital gain
  • Stock holding period continues unchanged

    • If Assigned

  • Premium added to sale price of stock
  • Combined with stock gain/loss
  • Stock's holding period determines treatment

    • Qualified Covered Calls

    Certain covered calls don't affect long-term holding periods:

  • OTM calls at specific strikes
  • More than 30 days to expiration

    • Qualified: Your stock's holding period continues Unqualified: Holding period suspends

    Tax-Efficient Strategies

  • Use tax-advantaged accounts - IRA/401k for covered calls
  • Track holding periods - Know when shares become long-term
  • Harvest losses - Offset gains with losing positions
  • Consider qualified calls - Preserve long-term treatment

    • *Consult a tax professional for your specific situation.*