Reporting Sales of Covered Calls
This entry was posted on 3/15/2008 7:53 PM and is filed under uncategorized.
Selling Covered Calls is when you own a stock and sell the right for someone else to "Call" it away from you and make it theirs, at an agreed upon price. If your stock is trading for $100/share, you might sell a call for sometime to buy it at $105/share. So, if the stock rises above $105 before the call expires, this other person will most likely buy it. If the stock prices rises to $110, they can buy it from you for $105 and turn around and sell it for $110, making a quick profit. So what would sell such an option for? The market will determine this. I'd say all calls have an expiration date.
It to me is similar to selling an option on land. You can sell an option for someone to buy your land at an agreed upon price for a certain amount of time. The question de jour is, how to report the money from covered call sales on your 1040?
If the Call expires worthless, that means it isn't exercised, you report the income as capital gain. If the stock is called away from you, you add it to your Gross Proceeds when you report the sale of the stock, you just had to sell, because it was called away from you.
Most Covered Calls are written for less than a year. So the next question is, is the income from an expired call Long or Short term gain? It has some attributes of both long and short term. If the stock is called, this money is treated the same as the underlying stock, so it would be long term if the stock has been held for more than a year. But in the case of an expired call, it seems a short term bet was made that the stock wouldn't rise much. That's a question this CPA wishes to look into another day, and I'd appreciated your comments hopefully with links that support your position.
Brokers are getting good about providing Realized Gain and Loss Summaries. If you receive one of these from your Broker to help you with your income taxes, and you have Covered Call Sales, ask the broker if they correctly treated the Sales by adding them to any stock that was Called? And then ask them to prove it to you, by showing how they came up with the basis numbers related to covered calls sales?
Thanks to:
slcg.com
