Covered Call Options and Cost Basis

[smklerer]

Can anyone explain how the adjustment to the stock cost basis and the gain on an expired covered call interact? Does when have to  adjust the cost basis even though taxes are paid on the expired call premium?

[DavidD66]

When you sell a covered call option, it only affects the underlying stock basis if the option is exercised and the underlying stock is called away (i.e. you sell the stock).  In that case, your basis in the stock is reduced by the amount of the option premium.  If your call option expires worthless, then you have a reaalized short term gain for the amount of the premium.  There is no basis adjustment to the underlying stock.  

[smklerer]

The brokerage seems to adjust the cost basis by reducing it by the amount received as premium for the expired call option

[DavidD66]

I cannot explain why your broker would be adjusting the cost basis of the underlying stock after a covered call expired worthless.  The tax treatment of an expired call is very straight forward.  According to IRS Publication 550 (2024), Investment Income and Expenses (Including Capital Gains and Losses).

Writer of option.

If you write (grant) an option, how you report your gain or loss depends on whether it was exercised.

If you are not in the business of writing options and an option you write on stocks, securities, commodities, or commodity futures is not exercised (or repurchased), the amount you receive is a short-term capital gain.

If it is a short-term capital gain, it cannot be used as an adjustment to the basis of the stock.  

You might want to call your broker for an explanation.