Q. I sold 27 covered calls of Apple on June 10, 2022 for $12.60. I bought them back on June 15 for $11.60, yielding a $2,700 short-term capital gain. This sale was in my regular trading account, not a tax-deferred account like an IRA or 401(k). How much in taxes would be due and when? I don’t expect to have any losses to offset the capital gain.
— Investor
A. With such a volatile market, we hope you’re seeing the big picture of your portfolio.
Let’s explain who this works.
To sell or write a covered call option, the first step is the seller must own the underlying stock, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
In your case, you own Apple stock, which closed on June 10, 2022 at $137.13. A buyer paid you $12.60 for the right to buy your Apple shares at $137.13.
This would be a great investment if Apple were to suddenly shoot up to more than $149.73 ($137.13 + $12.60), Kiely said.
“If this were to happen the buyer would `call’ away your shares,” he said. “Call options have a finite life. In this example, let’s assume 30 days. If the underlying stock doesn’t shoot up within 30 days the option expires, worthless, and the seller keeps the $12.60.”
If you sell a call option without owning the stock you have a naked position, Kiely said. If the stock shoots up and the buyer calls the option, you don’t have the shares to give to the buyer. You must buy the shares on the open market and pay whatever the price is. Naked option selling is much risker than selling covered call options, he said.
You asked when you’ll have to pay the tax on the transaction.
As you noted, since the transaction was for less than one year, it is a short-term capital gain.
“Short-term gains are taxed as ordinary income,” Kiely said. “The rule for paying taxes is that you must pay the lesser of 100% of last year’s tax — or 110% if your adjusted gross income is over $150,000 — or 90% of the current year’s tax.”
So you have some basic arithmetic to take care of.
If your current withholdings plus estimated tax payments won’t be sufficient to cover the tax, you must make a third quarter estimated tax payment, Kiely said. That payment would be due on Sept. 15.
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Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.
