Tax question on a covered Leap

I buy a deep ITM Leap call. I write an OTM short-term call. the short-term call expires worthless. Do I book a short-term gain. Or do I subtract the gain from my basis on the Leap? And if the latter, does it affect when I can claim a long-term capital gain on the Leap?

Another way of looking at this, if I hold a Leap for say 13 months and sell it can I still take the long-term capital gain (with a reduced basis for calls sold?)

 

while I am not able to answer your tax question, I am curious about the strategy. Of course, this is not a new strategy, I have not seen much details. if you don't mind, can you pl. share some of the details?

thanks

 

I do know that if you are writing (short term) calls against a leap you may NOT claim long term capital gain/loss on the leap. Which makes sense because you are not "holding" the stock/leap without trading it for the required time. The way I read the code is the leap is treated like the equity in that the gain booked by the short term short calls reduce the basis so you don't have to account for each and every short call you write individually. Just the accounting when you dispose of the stock/leap.

I could be totally wrong of course

 

You have short-term capital gains treatment on the expired short-term call.

If you hold your LEAP for 13 months, you will have a long-term capital gain or loss.

 

This link has some basic tax info http://www.armencomp.com/options-capital-gains.html

Make sure you read the section on broad based index options:
"the 60/40 rule (60% of gains and losses are long-term and 40% are short-term, regardless of how long the securities are held). "

I got tired of dealing with the taxes and now trade options only in my Roth IRA accounts.

Theta

 

I agree with Freehouse. I believe you treat them as separate transactions for tax purposes.

 

I think I would consider the two transactions independent trades and book the P/L for each accordingly. If the leap is held more than 12 months I would consider it a L-T cap gain.

As I recall, the IRS says that if you substantially mitigated the risk with an offsetting position then your L-T holding period begins after the mitigation disappears. The problem is the definition of "substantially mitigated" is vague. My guess is that you still had considerable risk and it was not substantially mitigated. Of course, my opinion could differ from the IRS' opinion.

Don