Stocks, Options, Taxes: Part VI - Options And Tax Straddles, Covered Calls

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Practical insight and analysis on the accounting, audit and tax issues impacting investment companies. Posted by Investment Management Group on Option straddle tax treatment 9, In our last post, we examined the basics of the straddle rules, including the definition of a straddle and loss deferral rules associated with a straddle. In this post, we will look at an important exception to the straddle rules.

With respect to covered calls i. For a call option to be "qualified," it must meet five conditions. The first four conditions are option straddle tax treatment self-explanatory, however, the "deep-in-the-money" test needs further clarification.

A deep-in-the-money option is an option having a strike price lower than the "lowest qualified benchmark," a term generally meaning the highest available strike price which is less than the "applicable stock price. The tax rules in this area are somewhat complex. In general, for stock whose "applicable price" is:. The above is based upon generally available option strike prices. There are several exceptions to the rules described above for determining whether a call option option straddle tax treatment in the money.

They are as follows:. For options with terms greater than one year, in order to determine the applicable stock price, the price of the stock option straddle tax treatment to be adjusted by a "time factor" provided in tables found in the tax regulations, for the purposes of option straddle tax treatment deep-in-the-money test. There is another statutory exception to the straddle rules that says: We have heard this interpreted to apply only to substantially out of the money put options.

However, the regulations do not define when a put option is "substantially" out of the money. Investment Company Notebook Practical insight and analysis on the accounting, audit and tax issues impacting investment companies. Qualified Covered Call Exception With respect to covered calls i. In general, for stock whose "applicable price" is: They are as follows:

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