long term capital gain or short term capital gain

[Luo8888]

I bought a stock at $10, hold it for over a year.  The stock now is trading at $22 last month.  Instead of selling the stock directly, I sold some covered calls at strike price of $20, with a premium of $3 each, expiring in the same month as I sold the calls.  Stocks got called away at $20 as a result. 

So can I still treat the capital gain from the stock "sale" (bought at $10, call option exercised at $20) as long term gain?

Thanks!

Roger

[MinhT1]

Yes, if more than a year has elapsed between the date you bought the stock and the date the call option was exercised (when you sold that stock), then the capital gain is long-term.

[Luo8888]

Hi Minh,

I don't believe it is that simple.  Below is what I found out from my research.

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Special Considerations: Qualified vs. Unqualified Treatment

When writing ITM covered calls, the investor must first determine if the call is qualified or unqualified, as the latter of the two can have negative tax consequences. If a call is deemed to be unqualified, it will be taxed at the short-term rate, even if the underlying shares have been held for over a year. The guidelines regarding qualifications can be intricate, but the key is to ensure that the call is not lower by more than one strike price below the prior day's closing price, and the call has a time period of longer than 30 days until expiry.4

For example, Taylor has held shares of MSFT since January of last year at $36 per share and decides to write the June 5 $45 call receiving a premium of $2.65. Because the closing price of the last trading day (May 22) was $46.90, one strike below would be $46.50, and since the expiry is less than 30 days away, their covered call is unqualified and the holding period of their shares will be suspended. If on June 5, the call is exercised and Taylor's shares are called away, Taylor will realize short-term capital gains, even though the holding period of their shares was over a year.

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So in my little example, since I sold ITM call and held less than 30 days, should my capital gain from the stock sales be treated as short term gain?

Any other experts, please chime in....Thanks!!!

[fanfare]

Option writes are covered transactions, the broker will do all this busy work for you now. Just go with your 1099-B report supplied to you.

BTW , Microsoft hasn't been at $45 for many years now.

I told my friend to buy it but she did not listen.