By Dave Mirolli, Pilot and Managing Director, Wealth Management Advisor | Apollon Catalyst
“In this world nothing is certain except death and taxes.” — Benjamin Franklin
Taxes represent one of the most consistent and significant headwinds investors face over a lifetime. Whether you’re building wealth, selling a business, investing in real estate, or managing retirement income streams, understanding the tax implications of your decisions is critical. Tax planning, when done proactively, can help preserve more of what you earn and potentially improve long-term outcomes.
The Importance of Strategic Tax Planning
Too many investors view taxes as a once-a-year exercise—a reactive review of what was earned and spent. But proactive tax planning involves making intentional financial decisions before year-end to minimize your tax liability. Meeting with your CPA and financial advisor by the start of Q4 each year allows for meaningful decisions: accelerating or deferring income, harvesting gains or losses, and making qualified contributions that align with your overall goals.
High-net-worth individuals often work with teams that incorporate forward-looking strategies, such as equipment leasing for tax-efficient income, or structured installment sales that spread capital gains. These types of efforts can in some cases create meaningful tax savings in a given year—savings that, when reinvested, continue compounding for decades.
Avoiding Common Tax Mistakes with Capital Gains or Losses
Capital gains taxes apply when you sell investments for a profit. Long-term gains (held over a year) are taxed more favorably than short-term gains (less than a year). Yet many investors miss opportunities to strategically manage these. For example, selling underperforming assets before year-end to realize losses can offset gains elsewhere.
This “tax-loss harvesting” technique is one of the simplest but most underutilized tools in an investor’s toolkit. By realizing paper losses to offset realized gains, and then reinvesting in similar—but not identical—securities, you preserve your market exposure while reducing tax liability.
Ordinary vs. Qualified Dividends
Not all dividends are taxed the same. Ordinary dividends are taxed at your marginal income tax rate, which could exceed 30% for higher earners. Qualified dividends, by contrast, meet certain IRS holding requirements and are taxed at long-term capital gains rates—either 0%, 15%, or 20%, depending on your income.
Investors looking for income-generating portfolios should understand which of their holdings generate qualified vs. non-qualified dividends. For example, most U.S. company dividends are qualified, but real estate investment trusts (REITs) and certain foreign stocks often pay ordinary dividends. Structuring your portfolio with this in mind may improve after-tax outcomes.
Covered Call Option Writing and Taxation
Covered call writing—selling call options on stock you already own—is a strategy used to generate extra income. From a tax standpoint, how and when you close these options significantly impacts how you’re taxed.
If you write a call option and it expires worthless, the premium you received is taxed as a short-term capital gain, regardless of how long you held the underlying stock. If the call is exercised and you’re forced to sell the stock, your gain or loss is determined by adding the premium to your sale proceeds, and your holding period of the stock will determine whether it’s taxed at short- or long-term rates.
However, some investors utilize a strategy of closing out covered call positions before expiration to potentially receive long-term capital gain treatment—*if* the underlying stock was held long enough. The tax treatment of the closed-out option itself is typically still short-term, but when paired with a strategic exit from the underlying stock, total tax efficiency may improve.
How to Structure for Long-Term Capital Gains
There are scenarios where covered calls can result in long-term capital gains, but you must satisfy IRS holding period requirements and avoid disqualifying transactions:
1. Letting the Call Be Exercised:
– If you’ve held the underlying stock for more than one year, and the call is exercised (i.e., the stock is sold), the entire transaction (stock gain + premium) can be taxed at long-term capital gains rates.
2. Avoiding “Deep in the Money” Calls:
– The IRS has rules around qualified covered calls (QCCs). If you write calls too deep in the money, your holding period on the underlying stock may be “suspended.”
– This can disqualify your stock from receiving long-term treatment even if you’ve technically held it over a year.
3. Use Longer-Dated Options (LEAPS):
– Writing LEAPS calls (more than 9 months to expiration) may give you more flexibility in managing capital gains outcomes—especially if they are ultimately exercised after the long-term holding period is met.
4. Close the Position After Holding Period Met:
– If you sell a stock after holding it more than a year, and you previously wrote a call that was either closed or expired, the stock sale can still qualify for long-term capital gains.
Example: Stock Called Away After 1 Year
– John buys 1,000 shares of XYZ at $50 in January 2023.
– In February 2024, he writes a covered call at $60 expiring in March 2024, collecting $3 premium per share.
– The call is exercised, and shares are called away at $60.
Tax Result:
– John held the shares for more than a year.
– His total gain is $13/share ($10 stock appreciation + $3 premium).
– Entire gain is taxed at long-term capital gains rates.
The key takeaway is that frequent option writers need to track not only premiums and expiration dates but also the holding periods and disposition dates of the underlying securities. A proactive CPA or advisor can help structure these transactions to reduce tax drag.
Ultimately, taxes are not just a cost of investing—they are a variable that can be managed with thoughtful planning and discipline. Investors who understand how capital gains, dividends, and income strategies interact with the tax code can make more informed decisions and keep more of what they earn. While no strategy eliminates taxes entirely, proactive coordination between your financial advisor and CPA can significantly reduce unnecessary tax drag over time. By approaching taxes as an integral part of your investment strategy rather than an afterthought, you position your portfolio to grow more efficiently and help ensure that more of your wealth remains working for you and your family for years to come.
Apollon Wealth Management, LLC (“Apollon”) provides advice and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, Apollon has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing price to make decisions. This content is for informational purposes only and does not constitute investment, financial, tax or legal advice. It is not a recommendation or solicitation to buy or sell any security. When information is sourced from third parties, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change. Please consult a licensed professional before making investment, tax, or legal decisions. Please visit our website https://apollonwealthmanagement.com for other important disclosures.
