I am trying to determine if options premiums can be used to adjust a stocks cost basis.If you sold a put option and you were assigned the stock from it, or if you bought a call option and exercised it, the option premium would be used to adjust the stock's cost basis. A covered call does NOT adjust the cost basis of the stock, but under some circumstances it can adjust the holding period for the stock.I know that dividends and stock splits change the cost basis but I don't know about option premiums.Stock splits or stock dividends normally change the cost basis, cash dividends usually do not.Example:buy 100 shares of XYZ @ $20/share = $2000Sell a call option and receive a premium of 5 = $500Is my new cost basis for the stock = 2000-500 = 1500/100 shares = $15/shareNo, your cost basis is still $20/share.Or am I required to report the premium as a capital gain in the year that the option was written?No, until the option position is closed (by assignment, repurchase, or expiration) the profit or loss cannot be determined. The profit or loss is determined and (usually) recognized at the time the option position is closed.Another example:I buy a Call of XYZ @ 20 with a premium of 5 = 500Later I decide to exercise the option at 20. Is my cost basis @ 20/share or 25 per share since I had to pay the premium to buy the option?Your cost basis is $25/share.Covered calls are not always straight-forward for tax purposes. I wrote a post some time ago giving some of the consequences of selling covered calls. You can find it athttp://boards.fool.com/Message.asp?mid=12322382The IRS Publication 550 gives you more information about all types of options transactions, including covered calls.http://ftp.fedworld.gov/pub/irs-pdf/p550.pdfGood Luck,Z
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