Tax question - options
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Tax question - options Hi all, I'm in a covered calls group, and a question was posed that I would like to get an answer to. Can any of our resident tax code experts help me with this? Thanks! Happy holidays! It was my understanding that if an investor owns a stock and he sells an out of the money qualified covered call on the stock then the dividend from the stock remains qualified. However, I was recently reading IRS Pub 550 (which can be found at:http://www.irs.gov/pub/irs-pdf/p550.pdf) which states something different. I am looking at page 20, third column. The way I read that, if I own a stock and I sell a call against it then dividends from the stock are no longer qualified. Did something change? Am I missing something? Lynn Ostrem
Resource Management Group, Inc. 4439 McAllister Av NE St.Michael, MN 55376 Office: 763/497-5153 Fax: 763/497-5838 Cell: 612/750-4943 garbagecop@gmail.com Lynn, Out of the money covered calls do not impact the qualified nature of any dividends received. In the money calls do impact the holding period for purposes of determining long-term capital treatment and qualified dividends. The impact is different if the covered call is deep in the money vs. just in the money.
What you are missing in your reading of Pub. 550 is that your risk of loss is not diminished when you write an out of the money call option. You can find a good explanation with examples here: http://www.bbdcpa.com/blog/tax-consequences-associated-with-option-strategies-part-iv/. DRD and QDI, as used in the article, refer to the Dividend Received Deduction for corporate taxpayers and Qualified Dividend Income for individuals.
Ira Smilovitz On Tue, Dec 17, 2013 at 4:43 PM, Lynn Ostrem <garbagecop@gmail.com> wrote:
Thanks Ira. I'm sure that will help others who are struggling with options accounting. Lynn O. Lynn,
There is an interesting discussion of
this (and much more) at http://seekingalpha.com/article/1097581-stocks-options-taxes-part-ii-dividends .
Search for the paragraph starting "Wait, it gets worse." It suggests
there that a long put would affect the holding period requirement for qualified
dividends on the underlying stock, but a *qualified* covered call would
not. Note that a covered
call written less than 31 days before expiration is *not* "qualified" and,
apparently, can affect the holding period requirement for qualified
dividend on the underlying stock.
More detail is at http://seekingalpha.com/article/1109941-stocks-options-taxes-part-vi-options-and-tax-straddles-covered-calls and
in the references at the end of that article (one of which is the bbdcpa.com
reference Ira provided).
-Jim Thomas
Thanks Jim. I'll pass it along. Lynn O. |
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