Question about qualified covered calls tax treatment for long-term stock holdings

Thanks for the explanation! I have a follow-up question - does the amount by which the option was OTM matter? Like, if it was only a tiny bit OTM (like 0.5% above current price), would that still qualify? And what if the option expiration was exactly 30 days out when written - is that still considered "less than 30 days"?

For options with less than 30 days until expiration, the rule generally requires that the strike price not be lower than the current price (not in-the-money) when written. There isn't a specific percentage requirement for how far OTM it needs to be - even slightly OTM should qualify. Regarding the 30-day mark, the IRS language typically refers to options with "less than 30 days" until expiration, which would suggest that exactly 30 days would not fall into this category. However, in practice, exactly 30 days is often treated as "30 days or less." If you're in this exact situation, consulting with a tax professional for your specific case would be advisable.

What if I sell OTM covered calls of less than 30DTE on LEAPS that are held less than 1 year. Does this reset the holding period on the LEAPS?

Does it work with data from all the major brokerages? My trading platform's tax reporting for options is absolutely terrible and I never know if I'm getting the right treatment.

I'm skeptical about tools like this. How accurate is it really with something as complex as options tax treatment? Does it actually cite the specific IRS rules it's using to make these determinations?

Yes, it works with all the major brokerages! I use TD Ameritrade and it imported my trading history seamlessly, but I know it also supports Robinhood, E*TRADE, Fidelity, and others. The import process was really smooth - just download your trading history CSV and upload it. Regarding accuracy, I was skeptical too initially, but it actually shows you the specific IRS rules and publications it's referencing for each determination. For covered calls specifically, it cited Publication 550 and showed exactly which aspects of my trade qualified under the rules. The explanations are in plain English too, so you understand why each conclusion was reached. It's definitely more thorough than the generic info my CPA gave me.

How does this actually work? I've literally spent hours trying to get through to the IRS directly and always end up in an endless hold loop. Are they somehow getting priority access to IRS agents?

This sounds too good to be true. I've tried calling the IRS dozens of times over the past few years and it's always a minimum 2-hour wait if I get through at all. Are you sure you actually got an official IRS agent and not some third-party "tax expert"?

It's actually pretty straightforward. They use a system that continuously dials and navigates the IRS phone tree for you. When they finally get a spot in the queue, they call you and connect you directly to the IRS agent. You're talking to actual IRS representatives, not third-party advisors. The system basically does the waiting for you. You enter your phone number on their site, select which IRS department you need to reach, and go about your day. When they get through, you get a call connecting you directly to the IRS agent. The agent I spoke with was definitely an official IRS employee who could access my tax records and provide authoritative guidance.

Thanks for bringing this up - I totally missed this aspect! My stock was trading around $75 when I wrote the call, and the strike price was about 5% higher than the market price. Based on what you're saying, it sounds like I need to make sure the strike was within 90% of the stock price, which it definitely was since it was actually higher. Does that sound right?

Yes, you've got it right. Since your stock was trading around $75 (which falls in the $60.01-$150 range), the strike price needs to be at least 90% of the stock's price when written to be qualified. Since your strike was actually 5% higher than the market price (so 105% of the stock price), it easily meets this requirement. Your covered call sounds properly qualified based on both the OTM status when written and the strike price benchmark. You should be able to maintain your long-term capital gains treatment on the underlying shares if they get called away. Just make sure you document the conditions (price, dates, etc.) when you wrote the call in case there are any questions later.

Is that really true? I thought wash sale rules didn't apply to options with different strike prices or expiration dates. So if you buy back a covered call and then write a new one with either a different strike or expiration, it wouldn't trigger a wash sale.

You're right to question this - the wash sale rules for options are more nuanced than for stocks. Generally, options with different strike prices or expiration dates are considered "substantially different" securities, so buying back a call and writing a new one with different terms typically wouldn't trigger wash sale rules. However, if you buy back a call at a loss and immediately write another call with the exact same strike price and expiration date on the same underlying stock, that could potentially trigger wash sale treatment. The key is whether the options are "substantially identical." @Nia Davis - do you have a specific source on this? I d'be interested to see the IRS guidance on covered call wash sales, as it s'not something I ve'encountered frequently in practice.

This is really helpful advice about documenting everything! I've had issues with broker tax reporting before on regular stock trades, so I can only imagine how complex it gets with options. One question - when you mention "adjustments when filing," are you talking about manually overriding what the broker reports on the 1099, or is there a specific form or process for correcting options tax treatment? I want to make sure I handle this properly if my broker gets it wrong. Also, has anyone here had experience with brokers consistently getting covered call treatment right, or is it pretty much a given that you need to double-check their work on these more complex scenarios?

When it comes to adjustments, you typically don't override the 1099 directly - instead, you report the transactions as shown on the 1099 but then make adjustments on your tax return to reflect the correct treatment. For options, this often involves using Form 8949 to report the capital gains/losses with the proper characterization (short-term vs long-term). If your broker reports a qualified covered call assignment as short-term when it should be long-term, you'd list the transaction as reported on the 1099 but then use code "B" or another appropriate adjustment code to correct the holding period. You'd include a brief explanation like "Qualified covered call - adjusting to long-term treatment per IRC Section 1092." Regarding broker accuracy, in my experience the major brokers (Fidelity, Schwab, etc.) are generally pretty good with basic covered call scenarios, but they can struggle with edge cases or complex situations. Interactive Brokers tends to be more accurate with options tax reporting, but even they're not perfect. I always recommend keeping your own records of the key details - dates, prices, and qualifying conditions - so you can verify their treatment.

This is really reassuring to hear from someone who went through a similar situation! I'm curious - when you kept those detailed records, did you just maintain your own spreadsheet or did you use any specific documentation method that would be most helpful if the IRS ever questioned the qualification? Also, when your shares eventually got called away (if they did), did your broker correctly report the long-term capital gains treatment on the 1099, or did you have to make adjustments like some others mentioned? I want to be prepared for potential issues with the tax reporting since this is my first time dealing with covered calls on long-term holdings.

This is incredibly helpful information, thank you! As someone new to covered calls on long-term holdings, I really appreciate the clarification that qualification is "locked in" at the time of writing - that takes away a lot of my anxiety about the stock price movements since then. Your point about keeping detailed records makes perfect sense. I'm definitely going to start a spreadsheet like you mentioned. For the benchmark requirements you referenced, is there a specific IRS publication or resource where I can find the exact percentages for different stock price ranges? I want to make sure I'm calculating this correctly for future reference. Also, when you've had to make corrections to broker 1099s, was it typically because they reported qualified covered calls as short-term gains, or were there other common errors you encountered? I'd rather be prepared for what might go wrong so I can catch it early. Thanks again for sharing your experience - it's really reassuring to hear from someone who has navigated this successfully multiple times!

You can find the specific benchmark requirements in IRS Publication 550, Chapter 4 (Investment Income and Expenses), under the section on "Qualified Covered Calls." The percentages are: for stocks $25.01-$60, strike must be within 85% of stock price; $60.01-$150 needs 90%; $150.01+ needs 95%. There are also some special rules for stocks under $25. Regarding broker errors, the most common issue I've seen is brokers reporting the entire transaction as short-term when shares get called away, even when the covered call was qualified. They sometimes miss the qualification and just apply the default short-term treatment for options assignments. Less commonly, I've seen them incorrectly calculate the holding period start date when there were multiple option positions on the same stock. The key is to verify that your broker correctly identifies the call as "qualified" in their records. If they get that wrong, everything downstream gets messed up. Most major brokers have gotten better at this over the years, but it's still worth double-checking, especially for your first few covered call transactions.

This is exactly what I needed to hear! As someone who's been nervous about my first covered call on long-term holdings, all these responses have been incredibly reassuring. It sounds like the consensus is clear - qualification is locked in when you write the option, and since mine was OTM with less than 30 days to expiration, I should be good for LTCG treatment. I'm definitely going to start keeping detailed records like everyone suggested. It seems like having your own documentation is crucial, especially since broker tax reporting can sometimes be incorrect for these more complex scenarios. One quick question for the group - when documenting the "exact stock price" when writing the call, should I use the closing price from that day, or the actual price at the moment I placed the trade? I want to make sure I'm recording the right reference point for the qualification determination. Thanks to everyone who shared their experiences - this community has been incredibly helpful!