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Consider a situation where an investor owns a stock for over a year and sells calls against it that expire in about 90 days. You can assume that this is a qualified covered call for tax purposes.

After some time, the calls are deep in the money and the investor is about to get assigned on the calls. If assigned on the calls he will have a 10K long term capital gain. If he buys the calls back he will have a 5K short term loss. If he just sells the stock he will have a 15K long term capital gain. Assuming the investor already has other short term capital gains then from a tax point of view he is better off buying back the calls and selling the stock out right.

Do I have that right? I am also assuming that since he was short the call option for less than a year the loss in the calls would be considered short term. Is that right?

I posted this question about 5 years ago. Here is a link to the original question: The old question

Five years ago, I was told (and I believe correctly so) that the repurchase of the option would generate a long term loss not the short term loss that I am looking for. However, looking at the latest version of pub 550 the wording has changed. Therefore I am thinking the tax code has changed and now it is a short term gain. Is it?

Bob

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  • Short options are short term capital gains, regardless of how long it is until expiry unless the option is assigned. Then, the option proceeds are folded into the acquisition cost (or sale proceeds).
    – Bob Baerker
    Commented Nov 6, 2022 at 23:09
  • @BobBaerker Has the tax code changed in the last 5 years? What about the case where you are buying it back at a loss?
    – Bob
    Commented Nov 6, 2022 at 23:12
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    I'm not aware of any tax code changes on the matter between 2017 and today, but the IRS publication wording may change for various reasons. Publications are not a legal authority and you shouldn't rely on them when arguing your position in courts or audits (see here: For that reason, the IRS takes the position that taxpayers may not rely on them and that the IRS may change its position at any time)
    – littleadv
    Commented Nov 6, 2022 at 23:58
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    "Five years ago, I was told (and I believe correctly so) that the repurchase of the option would generate a long term loss not the short term loss that I am looking for." Buying to close a short option is always a STCG, regardless of how long the option was open.
    – Bob Baerker
    Commented Nov 7, 2022 at 19:45

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The loss would be a long term capital loss. If you look at section 1092 of the tax code, it says:

Any loss with respect to such option shall be treated as long-term capital loss if, at the time such loss is realized, gain on the sale or exchange of such stock would be treated as long-term capital gain.

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  • Short options are short term capital gains, regardless of how long it is until expiry unless the option is assigned. Then, the option proceeds are folded into the acquisition cost (or sale proceeds).
    – Bob Baerker
    Commented Nov 7, 2022 at 19:43

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