Tax Consequences Associated With Option Strategies- Part I | BBD, LLP
Posted by Investment Management Group Oct 7, 2011 11:40:05 AM
As the investment world becomes more and more complex, we here at BBD are beginning to see more and more funds being created that employ alternative investment strategies. Although, it is not a new concept by any means, some of the new funds we see employ option oriented strategies (particularly covered call writing) to enhance total returns. This post begins a four-part series that explores some of the tax consequences involved with writing covered calls against a long investment portfolio. The primary tax concerns center around rules that defer the deductibility of capital losses on “straddles”; holding period suspensions for stocks subject to written calls which can cause what might otherwise be a tax favored long-term capital gain to be treated as a short term capital gain; and limitations on the ability to characterize dividends on stocks subject to written calls as either eligible for the corporate dividends received deduction (“DRD”) or the favored tax rates afforded to qualified dividend income (“QDI”). This post will present the basics of the straddle rules.
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