3

I know I will have a large $70,000 capital gain in the beginning of 2020 (due to my selling deep-in-the-money covered calls which will expire, and therefore get exercised, in January). Would the IRS allow me to claim part of this gain in 2019 without truly selling the stock yet? The IRS normally wants gains accounted for as early as possible, so I have hope that I could just fill out my 2019 tax form to show the shares were sold "Jan 2020".

This is beneficial for me because I can completely avoid paying tax if I keep my income each year below $39,375 (otherwise I enter the 15% capital gains rate bracket). Assume I have no other income. It seems fair/just to me that I should not be penalized by the IRS for my income being clumpy (since I am realizing gains early, not late).

I could of course sell off my position early (buying back the call and selling the stock within 2019), but the point of my question is to avoid the hassle/fees of doing this. Is there any trick besides selling off my position early? I know about the mark-to-market tax election, but I don't want to do that since I own other stocks which are up (I am not likely to sell these other stocks within the next few years).

Improve this question
6
  • You can sell the shares now and buy them back immediately to take the gain this year. The wash sale rule wouldn’t apply, since it’s a gain.
    – prl
    Commented Dec 27, 2019 at 17:07
  • Anyone down-voting this have feedback? Seems a solid question to me.
    – Hart CO
    Commented Dec 27, 2019 at 17:13
  • @Hart CO - I'm the down voting culprit. If you click the up or down vote by error, you can't change your vote unless the question is edited (which I then did). This system error is perpetuated after you edit because you can't just retract the down vote and restore the original condition. Not that I care but reversing the down vote then becomes an up vote (and vice versa). It's a +2 or a -2 event.
    – Bob Baerker
    Commented Dec 27, 2019 at 17:26
  • @BobBaerker Ah yeah, I know that issue. You weren't the only one so it surprised me.
    – Hart CO
    Commented Dec 27, 2019 at 17:34
  • @prl - Could you make that an answer so Bob Baerker and others could comment with any complications? This actually has the added benefit of giving me a small short-term loss in 2020 since my cost basis for the 2020-exercised calls can then use the high cost of the newly-purchased shares (though this will just be offset against long-term gains in most 2020 outcomes). I would do your suggested wash for about half of my shares (I was wrongly thinking before that I would also buy back half the calls in 2019, but now see that it's better to leave all calls alone).
    – bobuhito
    Commented Dec 27, 2019 at 18:30

2 Answers 2

Reset to default
4

No, the IRS expects you to report the gains/losses in the year they occurred. Your brokerage will report this to the IRS in the proper year, so you'd have issues from the jump if you tried to claim the gains for the prior year.

Note that the $39,375 threshold for the 0% long-term capital gain rate is based on taxable income (AGI - deductions), so you can still be in the 0% long-term bracket above $39,375 gross income.

Improve this answer
2

I assume that when sold, these were OTM covered calls and now you have a large gain on the stock? Just checking because if you sold deep ITM calls at the outset, there wouldn't be a large taxable gain unless the stock had already appreciated a lot.

As for the IRS, gains and losses are reported in the year that they occur. You cannot back date a transaction that hasn't occurred yet. Your only option, so to speak, is to do as you suggested - close some of these covered calls this year.

I'm curious as to why you mentioned the mark-to-market tax election. That only applies to those who have been granted Trader Tax Status by the IRS and it isn't an elective. You have to be a heavy duty trader to get it and it's not easy to obtain. Once approved, your only choice is MTM. While it has many benefits (simplified accounting, exemption from wash sales, business deductions, no SE taxes, no $3,000 annual loss deduction limit), it gives up long term capital gain status.

Improve this answer
2
  • Yes, these were originally OTM covered calls and I now have a large gain on the stock (so the calls are now deep ITM).
    – bobuhito
    Commented Dec 27, 2019 at 18:33
  • As Kevin Costner said in "Dancing With Wolves, nice trade!
    – Bob Baerker
    Commented Dec 27, 2019 at 20:44

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .