I made many covered call stock/option transactions in 2008. E.g. buying Stock ABC and selling/writing call option on stock ABC. Most/all were deep in-the-money calls and most/all were not held for >
30 days. Also some were technically wash sales: E.g. July 1, buy/write Stock ABC July 20, stock ABC called (sold) WASH July 29, buy/write stock ABC again August 20, stock ABC called (sold) Also sometimes the option expired unexercised and I sold later on.I made sure that all my positions were closed before 12/31/2008 (and all were opened in 2008).
It seems clear that I can easily compute my EXACT tax liability(short- term gain) by just reducing my cost basis of the stock by the option premium received for each 1099 stock sale listed. This would be the "easy-way" to report them on my tax form. E.g. for each sale, list on Sched D: Cost basis: stock buy price - option premium
I do understand (alla Pub 550) that this not the proper way to report all the transactions because of the WASH sales and also because some of the options may be STRADDLES, but if they are reported the correct- way the tax liability will be exactly the same as the easy-way (all positions were opened and closed in a single tax-year). It seems pointless to spend the extra time to do it the correct way. Even if there's an audit no extra taxes would be due anyway. Also, I would also guess that, because the option transactions are not reported on the 1099, doing it the easy-way would actually reduce the possiblity of an audit because there would be a clean Schedule D with the total sales proceeds matching the 1099 reporting number.
Can anyone think of practical reason not to use the easy-way?