united-states income-tax
Buying back a covered call
<p>Consider a situation where an investor owns a stock for over a year and sells calls against it that expire in about 90 days. You can assume that this is a qualified covered call for tax purposes.</p>
<p>After some time, the calls are deep in the money and the investor is about to get assigned on the calls. He wants to close his position. If he does nothing, he will be assigned on the calls he will have a 10K long term capital gain. Another option is to buy back the calls and then sell the stock out right. Buying back the option will generate a 5K capital loss. Selling the stock will generate a 15K long term capital gain. He has other short term gains he would like to offset. Will the purchase of the option be a short term capital loss or a long term capital loss? Has there been any changes in this area of the tax code in the last five years?</p>

<p>The loss would be a long term capital loss. If you look at section 1092 of the tax code, it says:</p>
<blockquote>
<p>Any loss with respect to such option shall be treated as long-term
capital loss if, at the time such loss is realized, gain on the sale
or exchange of such stock would be treated as long-term capital gain.</p>
</blockquote>
<p>Note: I am not a lawyer and I have no formal education in law.</p>
