I need some help with my covered calls that is costing few thousands of state tax on non-existent gains.
In 2020, I obtained 4000 shares of XYZ in 2020 at $10 each, total $40k.
In 2024 Jan, I opened covered calls on 4000 shares of XYZ at strike of $60 expire in Apr 2024, for an option premium of $50k.
In 2024 Jan, shares of XYZ reached $100.
In 2024 Mar, I rolled the covered call on 4000 shares of XYZ to strike of $65, expire in Dec 2024, for a net option premium of $0.
(rollout covered call means I closed the initial $60 strike covered call for 200k at a loss, and opened a new covered call at the new $65 strike with new expiration date and gained 200k for an option premium)
In 2024 Dec, the option expired in the money and exercised at $65 per share, 4000 x $65 = 260k.
So... for my 4000 shares of XYZ, I had a profit of 270k. (260k for shares sold - 40k initial shares paid + 50k option premium)
I expected the 50k option premium be considered short term gain, and the 220k gain from the shares sold be long term gain. Turns out, the 50k option premium is also considered long term gain because the option was exercised. Long term gain is taxed at a lower rate so this means I owe less taxes than I initially expected. I expected the -200k and 200k that happened during the rollout to be irrelevant since they cancelled each other out.
Everything seems ok so far, and I set aside money for taxes on 270k.
However, because I did a rollout for the covered call in 2024 Mar, the 200k option premium is counted as long term gain because the option was exercised, and the underlying shares were held long term. However, the -200k used to close the previous covered call is counted as short term loss.
This means I have 220k long term gain for the shares sold, 50k short term gain from the initial option premium, 200k long term gain from the rollout, 200k short term loss from the rollout.
Typically this does not matter, since short term loss can be used to deduct against long term gain with the IRS... except in Washington state. Washington state capital gain tax only taxes long term gain and it does not allow short term loss to be deducted from long term gain.
Now I am on the hook for extra tax on the 200k long term gain from the rollout... and unable to use the 200k short term loss from the rollout for deduction.
I did the same thing in 2025 where I have options that will expire 2025 Dec that did a -800k/+800k rollout in Jan 2025... so likely in 2026 I will again be hit with taxes on another non-existent 800k gains, anything I can do now to address this issue in 2026?
