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I bought 3 LEAPs on XYZ at various times in 2019 which all expired in 14-17 months. I intend to sell or donate them once they reach long term status. However, I also wrote 3 CALL options on XYZ that were out-of-money when written. Am I correct in assuming that writing these CALLs doesn't affect the LEAP holding period? Is it necessary for me to close the short positions before end of year to avoid having to report the call spread as an open hedging transaction?

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A security is the specific option contract - i.e. the same call or put, underlying, strike price, and expiration date. So a purchase and sale in one security should not effect another. i.e. assuming the Calls are different securities from the LEAPS one should not affect the other.

However the IRS does care about use of 'related' securities if you are using them avoid paying taxes to circumvent the holding periods. e.g. you bought a LEAP and then instead of selling the LEAP at the market short term, bought a call in a nearby strike or nearby expiration to "cancel-out" the remainder of the LEAP.

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  • I don't follow your last sentence. There is no IRS requirement that you sell an option at any time. Their issue is if you realize a loss and buy a replacement position within 60 days, hence a wash sale. So if you buy a call LEAP and instead of selling it, you buy another call at a different strike, you now own two option positions. And even if the first was an appreciated deep ITM call and you then bought a put to lock in the gain, the IRS still wouldn't care because there's no attempt at tax deferment. Can you clarify your statement regarding 'canceling out the remainder of the LEAP? – Bob Baerker May 27 at 3:04
  • Depending on when you sell (or buy back) your option you may realize short term or long term capital gain depending on whether it is less than one year or more. – xirt May 27 at 4:20
  • It still makes no sense. Your original statement was ... and then instead of selling the LEAP at the market short term, bought a call in a nearby strike or nearby expiration to "cancel-out" the remainder of the LEAP but now you're talking about Depending on when you sell (or buy back) your option you may realize short term or long term capital gain depending on whether it is less than one year or more. Apart from this contradiction, this new statement has added a new error. All short options are taxed as short term gain even if they are LEAPs which were held more than one year. – Bob Baerker May 27 at 12:27
  • I have opened a new question to answer your questions: money.stackexchange.com/questions/125964/… – xirt May 28 at 4:12

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