7577 / How is the writer of a call taxed when the option is exercised by the owner?

When a listed or unlisted call is exercised and the writer thereof is called on to sell the underlying stock, the writer adds the amount of the option “premium” received for writing the call to the total strike price to determine the total amount realized on the sale. Then, to the extent that the total amount realized exceeds the writer’s tax basis in the stock sold, he or she realizes a capital gain; if the writer’s tax basis exceeds the total amount realized, he or she has a capital loss. (See Q 702 for the treatment of capital gains and losses.) The nature of such gain or loss generally depends on the holding period of the stock sold (see Q 699 and Q 702), regardless of the time the “call” was outstanding.¹