Tax issues of covered call writing in large portfolio?

Question

I'd like to sell four-to-six month Far-OTM covered calls on ~50 stocks; I'd also sell new 4-6 month calls whenever the prior calls expire. I'll have to make about 5-7 c.call transactions per month.

Since I have a full-time job, are there any tax issues I should be worried about? Can this volume of covered call option sales (upto about 60 sales orders per year for total 100-150 contracts) make me at risk of becoming an "active" trader and having the premiums taxed as income instead of capital gains? And if the premiums do get taxed as income, could that then cause any sales of the underlying equities to be taxed as income as well, or would I be able to maintain capital gains treatment on the underlying stocks?

Each year I make about 40-50 stock buy orders about perhaps about 20 sell orders so I'm probably doing about a 30% yearly asset turnover. The options proceeds would probably be under $12k per year in a $250k portfolio.

Answer 1

http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html 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.

Answer 2

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.