covered calls on ESPP stocks and tax situation..

#1. I wrote some covered calls on my ESPP shares (qualified dispositions) in 2007. These calls got assigned. I guess I just need to add the premium to the total stock sale price and follow the regular process to split Ordinary Income and Long Term gain on this ESPP sale while reporting the taxes? Here are the covered call details: # of ESPP stocks = 1000 (purchase price= $10)

5/2/07- sold 10 covered calls, Expiration July/2007 7/20/07 - Got assigned and 1000 stocks sold at $17 each

So, I just need to enter long term capital gain in schedule D and ordinary income(15% discount) in 1040. Do I need form 6781 here? I assume these are qualified covered calls?? Please advice.

#2. I bought back the covered calls (sold on ESPP stocks) at a loss. Do I just need to enter this as a long term capital loss in Sch D? details: # of ESPP stocks = 500

5/31/07- sold 5 covered calls, Exp Oct/2007 10/17/07- bought back these calls at a loss Do I need to report any thing on form 6781 here?

#3. I sold 10 naked calls (of the same company as ESPP stock but this time not a covered call but a Naked one) and bought them back on the same day at a loss. I guess this is not a Wash sale. Do I just need to report this as short term capital loss in Sch D? details:

10/17/07- sold 10 naked calls 10/17/07 - bought them back(or closed) at a loss

When you look at #2 and #3 above, there are 3 activities on 10/17/07. Am not sure if FIFO/LIFO rule applies here in matching the transactions across #2 and #3.

In summary: I did enough research on the net on this. I was confused if I really have any Straddle situation above that may require form

6781 in any of 3 cases above. I also read that any capital loss in above situations requires the use of form 6781. Appreciate your inputs. I will still continue my research on this topic.
Reply to
jumper
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This isn't a tax note but rather a (quasi-) legal/practical one: (1) Many companies have policies against employees selling the company stock short, writing calls, buying puts, etc. or any transaction where the employee makes money from the company stock going down. Have you verified that your trading actions don't violate company policy?

(2) Many companies have blackout policies that prohibit employees from trading in company stock *or derivatives thereof* during certain periods. Again, gave you verified that your trading actions don't violate company policy?

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Reply to
Rich Carreiro

Was the strike price $17, and cost on day of assignment greater than $17? If so, then I'm guessing that the cost date is the date your bought those 1000 shares, cost basis is the price you paid for the shares, sale date and price is the 7/20/07 details above. But where does the income from selling the options go? I'm guessing it would also go Schedule D - sale details is the 5/2/07 stuff above, and purchase date is none. So you would have 2 sets of positive income -- the first possibly long term, the second definitely short term.

Sorry, no idea what a straddle is.

Confusing, how can you buy back something that expired?

You mean you sold calls short? If so, then it looks like an ordinary Schedule D item.

Technically the wash sale rule applies on #2 (loss on 5 contracts is disallowed as >=5 contracts where purchased 30 days before or after the event). The disallowed loss is carried over to #3. As #3 was closed out by the end of the year, it doesn't matter how you report it as the total comes out the same.

But pay attention to Rich's comments. Trading in your own company stock (day trading, short sells, calls, puts, short calls, short puts, etc) may be disallowed, and could even raise trouble with the SEC.

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