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Covered call taxes: the basics, for the US and Canada

In the US, a covered call premium is usually taxed when the call ends, not when you sell it. If it expires or you buy it back, it's normally a short-term gain or loss. If you're assigned, the premium is added to the sale price of your shares. This is general information, not tax advice.

Options guide · 8-minute read · Updated 2026-10-26

The three ways a covered call ends (US)

A Covered call can end in three ways. Each one is treated differently.

1. It expires worthless. In the US, the premium is generally treated as a short-term capital gain on the expiry date. It doesn't matter how long you held the shares.
2. You buy it back. The difference between what you collected and what you paid to close is generally a short-term gain or loss.
3. You're assigned. The premium generally isn't taxed on its own. It's added to the sale price of the shares. Whether that share sale is short- or long-term depends on how long you held the shares.

One call, every ending (an illustration, not a trade idea)

You bought 100 shares of a made-up stock, XYZ, at $50 more than a year ago. You sell a $55 call for $1.00 and collect $100.

Look at the last row. You can owe tax on the $100 premium in a year when your shares are down $800. The loss on the shares only counts once you sell them. That catches people out.

Holding periods and dividends

Two more rules can matter, and both are detailed.

Holding period. Some covered calls can pause or reset the holding period on your shares. This mostly applies to calls sold well in the money, or with very little time left. The IRS rules on "qualified covered calls" and "straddles" decide which calls count. If you're close to the one-year mark on a big gain, ask before you sell an in-the-money call.

Qualified dividends. For a dividend to get the lower "qualified" rate, you generally must hold the shares for more than 60 days in a window around the Ex-dividend date. Some covered calls, mainly deep in-the-money ones, can stop those days from counting. Again, ask a tax professional if dividends are a big part of why you own the stock.

Retirement accounts in the US

Trades inside an IRA, Roth IRA or many 401(k) plans generally aren't taxed year by year. Premiums, gains and losses stay inside the account. Many brokers allow covered calls in an IRA; fewer 401(k) plans offer options at all. See the wheel in an IRA and the wheel in a Roth IRA.

The flip side: a loss inside a retirement account can't be used to offset gains elsewhere.

Canada: the basics

Again: general information, not tax advice.

• In a taxable account, many investors treat option premiums as capital gains or losses. Under the CRA's general approach, a premium for writing an option is often reported when received. If the call is later exercised, it's folded into the sale price of the shares instead. People who trade very often may be treated as earning business income, which is taxed differently.
• In a TFSA or RRSP, gains inside the account generally aren't taxed. Covered calls are widely allowed in both. Options permissions differ by broker, including Questrade, IBKR and Wealthsimple.
• Frequent trading in a TFSA can draw attention. The CRA has said that trading in a TFSA can be treated as carrying on a business. If you trade often in one, ask an accountant.

See the wheel in a TFSA and the wheel in an RRSP.

What to keep for tax time

• Every option trade: date opened, date closed, premium in, cost to close, fees.
• Assignments: which shares were sold, when you bought them, and the premium tied to them.
• Dividends and the dates you held the shares around each ex-dividend date.
• Your broker's year-end forms. In the US, that's the 1099-B. Check that assigned calls show up the way you expect.

A simple journal makes this easy. The same log you'd keep for the wheel strategy can hold every number above. See the wheel tracking spreadsheet.

Questions