When I sell call options based on an underlying security that I own (covered call writing), how are the proceeds treated fro tax purposes? As ordinary income? As a short-term capital gain?
Is taxation of the option proceeds affected by how long I've held the underlying stock, and whether I ultimately sell it at a profit or a loss, or are these unrelated transactions?
The tax comes when you close the position. If the option expires worthless it's as if you bought it back for $0. There's a short-term capital gain for the difference between your short-sale price and your buyback price on the option. I believe the capital gain is always short-term because short sales are treated as short-term even if you hold them open more than one year.
If the option is exercised (calling away your stock) then you add the premium to your sale price on the stock and then compute the capital gain. So in this case you can end up treating the premium as a long-term capital gain.
See IRS pub 550 http://www.irs.gov/publications/p550/ch04.html#en_US_2010_publink100010619 Search for "Writers of puts and calls"
Successful covered calls are short term capital gains. The amount of time you have owned the underlying security is irrelevant. The gain occurred in the option period which will be an amount of days less than needed for a long term capital gain classification.
Failed Covered calls can be either as the date you acquired the stock you are forced to sell determines their classification.
