Tax questions related to covered call options?

When assigned you do not need to report the option anywhere. as long as the stock sale price includes the premium.

When you wrote covered call options that had less than 30 days until expiration you created a straddle. If

1. you clearly identified the straddle on your records before the close of the day on which you acquired it and

2. it was not part of a larger straddle

it is an identified straddle.

<<<Does this count as an "identified straddle" where I just increase the basis in the stock by the amount of the loss>>>

If you identified in your records in a timely manner, that is the way I read the rule. However, I should warn you that this rule has changed since the last time I had to deal with it, so you are getting my first interpretation of the new language.

<<<does that fact that the expiration date was less than 30 days away mean that it is subject to the traditional loss deferral rules?>>>

No. The fact that the expiration date was less than 30 days away means that it was a straddle instead of a qualified covered call.

<<<what effect is there on my holding period for the stock - was it terminated when I sold the options or just suspended>>>

Unless you had already owned the stock for over a year when you sold the sold the covered calls, it was terminated and started again at the time you closed the calls.

The holding period is suspended when an in-the-money qualified covered call is sold, but since this was a straddle instead of a qualified covered call it does not matter what the strike price was.

Fair warning: I am not a tax professional. I had a very good understanding of the straddle rules before this latest change, but I have not researched this change thoroughly.

If I were you, I would repeat this question on the message board at www.fairmark.com which is moderated by a tax lawyer. I would specifically reference page 59 of IRS Publication 550 under the heading on "Identified Straddles."

1. You're absolutely correct. Add the premium to the sales price and record on Schedule D. Follow direction on Sch D and unless you have losses that qualify for a carryover, enter your gain on Line 13 of your Form 1040.

2. I believe you have a loss here and the loss deferral rules apply. Your holding period probably doesn't matter and it will be considered short term any way you look at it. I strongly encourage you to call IRS on that one especially if you don't use a CPA and review FORM 6781 before you call them.

Best of luck.

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