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I wrote covered calls against multiple lots of company A stock, each lot with a different cost basis. I originally bought the shares through eTrade, later transferring them to Vanguard. Only a portion of my calls will expire in the money, and I didn't specify lots when I wrote the calls. Because the transfer didn't include basis, I am responsible for tracking the basis myself.

Can I select the original lots myself when reporting the sales on my taxes because I'm tracking the cost basis myself, making Vanguard's FIFO irrelevant?

Related question: Covered call on stock held for different periods

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When you sell shares (no options involved):

If you plan to use any method besides FIFO, including LIFO, you must specifically direct your broker as to which shares to sell so that your taxes end up the way you want. According to Internal Revenue Service Publication 550, the burden is on you to prove that you informed your broker of which shares you wanted sold and that your broker followed your requests. If you can't prove that, you're treated as having sold your oldest shares first. See Zack's article.

I can't imagine that you could ignore this regulation if you sold covered calls and you were assigned, simply tracking the cost basis myself, making Vanguard's FIFO irrelevant.

I've never come across a broker that allows you to specify lots when you write covered calls but I've only used about half a dozen brokers for options in 35+ years. And if that ability exists, the key question is, does Vanguard allow you to do so? Call them.

As I mentioned in my answer that you linked, when options are exercised, the OCC utilizes a "wheel" to determine who will be assigned. They notify your broker who has an internal process that designates who will be assigned (relevant prior to expiration). I believe that this will be FIFO and I question whether one can intercede in this OCC process. The only way to find out is to call your broker and ask if you have the ability to designate which of your shares will be assigned. I doubt that you can.

If the answer is no to all of the above then you have two final choices for closing the position:

  • If you can designate which shares are sold when you close a covered call via a Buy/Write order, then do it that way so that you can work the order for a more favorable exit price (call your broker).

  • If you cannot designate which shares are sold with a Buy/Write order, buy to close the short call and sell the shares that you want to designate (see the Zack's information above).

  • Thanks for your answer. Who tracks FIFO? To Vanguard, they all have the same "first-in" date. Seems like something would need to know the "first-in" from eTrade, which as far as I can tell doesn't get reported by either them or Vanguard. – Spig Jan 13 at 19:27
  • BTW, I tried to specify a lot on another transaction with Vanguard, and you're right about not being able to specify it. I couldn't figure out any way to do it from the web. – Spig Jan 13 at 19:28
  • At Vanguard, after a sale you have some days (one or two?) to specify/change the specific lot that was sold, even when they were sold under assumption of FIFO. I don't know if this applies also to sales through covered options exercising, but I would think so. – Aganju Jan 13 at 20:10
  • FIFO is the default at all brokers. You can alter that if you designate which lots you want sold (or covered if short). You have now raised an interesting point which complicates things. Since the shares were transferred from E*trade, Vanguard has the same "first-in" date. Proper accounting would probably require that you figure out how to identify which lot is which, if even possible. Or quite possibly, now you don't have to do that at all because Vanguard has no clue which lots are the oldest and you might get away with your own determination of cost basis. A conundrum, eh? – Bob Baerker Jan 13 at 20:34

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