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.