IRS Tax Implication - Exercise ITM Calls

Discussion in 'Taxes and Accounting' started by Bobby T, Apr 27, 2022.

  1. Bobby T

    Bobby T

    Hopefully someone here knows the answer...

    Say a stock is trading at $100, and I buy a call option with strike of $20 (let's pretend the premium was $81) and I immediately exercise with the intention to hold stock long term.

    Which of these scenarios is most accurate from a tax perspective:
    1. Short term loss of $81 on the option and a cost basis in the stock at $20 (i.e., $80 unrealized gain).
    2. Cost basis in the stock at $101 with a $0 short term loss.
    3. Cost basis in the stock at $101 with a $1 short term loss.
    4. Other??

    Thanks in advance,
    Bobby
     
  2. ajacobson

    ajacobson

    $101 cost basis - taxable event when you sell the stock. Exercise just adjusts your basis. Read IRS form 550. Don't confuse the treatment with the treatment of employee options.
     
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