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: Short term loss of $81 on the option and a cost basis in the stock at $20 (i.e., $80 unrealized gain). Cost basis in the stock at $101 with a $0 short term loss. Cost basis in the stock at $101 with a $1 short term loss. Other?? Thanks in advance, Bobby
$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.