Covered Call Writing and Favorable Dividend Tax Treatment Go Together
You can earn more income from stock ownership through covered call writing.
Provided the call written is a “Qualified Covered Call”, qualifying dividends received on the underlying stock remain eligible for the 15% maximum tax rate on dividends.
Other writes involving a nonqualified call may cause the dividends to be taxed at ordinary income rates.
What is a Qualified Covered Call?
Covered Call option writing simply means selling a call option while simultaneously owning the underlying stock.
Generally, a covered call option is qualified if it has more than 30 days before its expiration date and is out-of-the-money, at-the-money or not “deep-in-the-money”.
The IRS has a set of regulations for determining when an in-the-money option is or is not qualified based on the stock price, time to expiration and lowest acceptable strike price.
Caution:
Writing a covered call that is not a qualified covered will cause dividends received on the underlying stock to be ineligible for the 15% maximum tax rate on dividends and have other negative tax consequences.
Take-Away:
- Writing at or out-of-the-money qualified covered calls will not affect qualified dividends on the underlying stock being eligible for the 15% maximum tax rate on dividends.
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