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I sold a covered call for $1000. If I buy it back for $5000 before the expiration date, will the $4000 considered a short term loss and will it offset my short term gain and long term gain? I do not mind keeping the underlying stock.

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If you buy the call back before expiration, the $4,000 will be considered a short term loss regardless of the length of time that the option position was open (short sales are treated as short-term even if they were open for more than one year).

It might have been a good idea to either cover the short call before it appreciated so much or to have rolled it up and out for a small loss or even a credit but as it is, I am not a fan of realizing option losses while carrying paper gains because the market has a perverse way of making you pay for that. I would sooner adjust the position, book gains and carry paper losses.

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  • Thank you. Also, once I buy back and use that loss for my 2020 gains, can I immediately go ahead and sell new covered calls for the same security for same or another expiration date.
    – user105017
    Dec 27, 2020 at 14:42
  • When it comes to options, there's a lot of ambiguity in US tax law. AFAIC, if you sell a call on the same underlying within 30 days before and after realizing a loss on an existing call, it's a wash sale since the calls are substantially identical. You should verify this yourself before doing so. A wash sale has no consequence if the entire position is closed before the end of the year and you remain out of it for 30 days. This is one of the reasons that I previously mentioned rolling for a small loss or a credit before the option gets away from you.
    – Bob Baerker
    Dec 27, 2020 at 15:21

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