Taxes: Selling covered calls at a loss

Question

Let's say I own 100 shares of X with a holding period of >1 year and I have 1 covered call option written against those shares. On the day of expiry, it's looking like the stock is up much higher than the strike price. This means the value of the option is higher now than when I initially sold the call option.

I see 2 possible outcomes:

1. My 100 shares get called away. In this case, I get taxed the long term capital gains rate of (strike price + premium) - (initial purchase price of the shares).

2. I decide to buy back the option at a loss and then immediately sell my 100 shares in the market. In the case, I claim (1) a short term loss on the option and (2) a long term capital gains rate of (current market price of shares) - (initial purchase price of shares)

Strategy #2 sounds like the smarter option from a tax perspective. While the amount of income I generate will be about the same, #2 allows me to claim more of it as a short term loss (at the expense of more long term capital gains) than #1.

Does this make sense? Is there some tax exception I should be aware of?

Thanks for your eyes on this.

EDIT: This is for the US

Answer 1

Are you completely set on selling the underlying position? A third option would be to roll the call up and out to a longer expiration with a higher strike to collect more premium against the underlying. That way you could avoid the large capital gains on the stock altogether while collecting more premium. Kind of a side step strategy so I apologize if that's not what you wanted.