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The tax advantages of a qualified covered call

A covered call is a short call written on some underlying.

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Editors note: this article now has a calculator that captures more nuance. In general, the structure of the covered call (namely, its strike and tenor) governs eventual taxation, including: 1) Whether a capital loss is deferred, 2) Whether dividends stay qualified, 3) How a loss on the call is taxed, 4) Whether the stock's holding period changes.

Covered calls have been around forever, but they’re especially popular now because “income” ETFs have exploded in popularity.

In my free time, I monitor the derivative income ETF market

Under some conditions, if the call and the underlying hedge are substantially offsetting, the dreaded straddle rules kick in.

Speaking loosely, the straddle rules force losses to be deferred, usually exactly the opposite of what investors want.

But… there’s a statutory way of avoiding straddle treatment if the covered call is "qualified."

How does that work and are there more tax implications beyond the straddle rules?