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For example, if I were to buy 100 shares in APPL today and sell a covered call option with an expiration year of 2022, would the premium that I receive be realized upon sale or when the option expires or is bought back?

I'm asking this question purely to understand how I would go about reporting my sale on my tax return. If the premium is considered realized gain at the time of sale, then I'm guessing I would need to report it on my 2021 tax return. However, if it's considered realized at the time of expiration, then I'm guessing it would be reported on my 2022 tax return.

Side note: Question pertaining to tax policy in the U.S.

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Premiums are always received upfront, plus a day or two for settlement. Premiums are not received when an option position is closed or expires.

It's not taxable at that time, however. The premium received (or paid for a long option) is accounted for when the position is closed (e.g. when a short option is bought back) or when the option expires. The premium paid/received is used to adjust the cost basis of the stock if the option is exercised, or treated as expense/income if the option is closed or expires worthless.

So in your case, if you sold a covered call that expired in 2022 and did not close the position in 2021, your premium would not be taxable in 2021. You'd either record a gain if the option was bought or expired worthless in 2022, or it would be used to adjust the cost basis of your apple stock down (meaning more gain, meaning more tax) if the call was exercised.

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  • Yes, that's what I meant. I know that you receive the premium up front, but I didn't know whether it would be considered "realized" from a tax perspective at the time of sale.
    – ARJ
    Nov 16 at 22:01
  • So I wouldn't need to include any information about that option sale on this year's tax return right? It's because I currently have an overall profit of $950 for this year. If I have to report the premium from my option sale for 2020, my gains would exceed the $1100 limit for filing taxes, and I would have to file. However, if I don't, I do have to worry about filing this year.
    – ARJ
    Nov 16 at 22:04
  • @ARJ - If your covered called was exercised by the owner in 2021, resulting in assignment of your position, you would be liable for taxes if your combined stock/call position resulted in a gain. This is not a likely event if there is time premium remaining in the call but you should be aware of this possibility. FWIW, all written options are taxable as STCG regardless of the length of time that they are open. Equities settle in 2 days, options in one day. Nov 16 at 22:21
  • @BobBaerker But if the options are not assigned until 2022, I won't have to report that income on my tax return until 2021 right?
    – ARJ
    Nov 16 at 23:07
  • That's correct. Nov 17 at 2:02

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