Comments on: Tax issues of covered call writing in large portfolio? http://www.moneysnatcher.com/news/tax-issues-of-covered-call-writing-in-large-portfolio/ Money Snatcher Finance Blog Fri, 12 Jun 2009 17:08:06 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: larry http://www.moneysnatcher.com/news/tax-issues-of-covered-call-writing-in-large-portfolio/comment-page-1/#comment-101 larry Wed, 18 Feb 2009 12:39:49 +0000 http://www.moneysnatcher.com/canada/tax-issues-of-covered-call-writing-in-large-portfolio/#comment-101 If you are purchasing equities to sell calls (buy-write), the 'premiums' you receive on the call will be (short term) ordinary income and taxed at ordinary rates, whether you roll them or not. Any profit (or loss) on the underlying security will be taxed according to the net holding period of the security. If you are doing true buy-writes with four to six month calls, whether in, at or out of the money, any gains or losses will be taxed at short term rates. If you are legging in and writing calls on securities you have held for longer than a year, your gain or loss will be treated as long term. If your holding period is just shy of a year, take into consideration that your holding period is suspended for that length of time you are not "at-risk" in the securities. Characterisation as an "active" trader does not seem to be an issue here, since you are dealing with short term options. Ignore the previous answer as to maintenance of gains in your account. Your taxable event is triggered upon the disposition of the investment, not when or if you withdraw funds from your account. In addition, if you desire competent tax advice, there is no reason to inquire anonymously of the IRS. A guidance question does not trigger an audit, nor land you on a list for further followup. Another alternative is to seek your answer from a professional. While the professional will charge you, you will have concrete IRC Code citations upon whih to rely. Best wishes to you. By the way, it is fairly well know that shorter term calls (current and forward months) are generally more profitable than far out calls...if premium isyour goal. If you are purchasing equities to sell calls (buy-write), the ‘premiums’ you receive on the call will be (short term) ordinary income and taxed at ordinary rates, whether you roll them or not. Any profit (or loss) on the underlying security will be taxed according to the net holding period of the security. If you are doing true buy-writes with four to six month calls, whether in, at or out of the money, any gains or losses will be taxed at short term rates. If you are legging in and writing calls on securities you have held for longer than a year, your gain or loss will be treated as long term. If your holding period is just shy of a year, take into consideration that your holding period is suspended for that length of time you are not “at-risk” in the securities. Characterisation as an “active” trader does not seem to be an issue here, since you are dealing with short term options. Ignore the previous answer as to maintenance of gains in your account. Your taxable event is triggered upon the disposition of the investment, not when or if you withdraw funds from your account. In addition, if you desire competent tax advice, there is no reason to inquire anonymously of the IRS. A guidance question does not trigger an audit, nor land you on a list for further followup. Another alternative is to seek your answer from a professional. While the professional will charge you, you will have concrete IRC Code citations upon whih to rely. Best wishes to you. By the way, it is fairly well know that shorter term calls (current and forward months) are generally more profitable than far out calls…if premium isyour goal.

]]> By: Mick http://www.moneysnatcher.com/news/tax-issues-of-covered-call-writing-in-large-portfolio/comment-page-1/#comment-100 Mick Tue, 17 Feb 2009 00:11:22 +0000 http://www.moneysnatcher.com/canada/tax-issues-of-covered-call-writing-in-large-portfolio/#comment-100 will give you a headache over this one. You can always call anonymously to the tax specialists at Canada Customs and Revenue Agency. They will likely put you through to a senior specialist. The number to call is 1-800-959-8281. If you are not taking the profits out of your investing account, I think you have a strong argument that it's all capital income. If you are removing the profits from this account and taking it as personal income, you might have a problem (or if you do it full time, etc.). You could always transfer some of the underlying securites that are not written in contracts yet into a SDRSP that allows for covered call writing. Your annual order numbers are roughly what a few of us do in a month (and some in a week) and we've never had problems. The joys of options... Like I said, though, call CRA and log who you spoke to and when. You shouldn't lose sleep over this, though. Hope this helps. Good luck. will give you a headache over this one.

You can always call anonymously to the tax specialists at Canada Customs and Revenue Agency. They will likely put you through to a senior specialist. The number to call is 1-800-959-8281.

If you are not taking the profits out of your investing account, I think you have a strong argument that it’s all capital income. If you are removing the profits from this account and taking it as personal income, you might have a problem (or if you do it full time, etc.).

You could always transfer some of the underlying securites that are not written in contracts yet into a SDRSP that allows for covered call writing.

Your annual order numbers are roughly what a few of us do in a month (and some in a week) and we’ve never had problems. The joys of options…

Like I said, though, call CRA and log who you spoke to and when. You shouldn’t lose sleep over this, though.

Hope this helps. Good luck.

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