6

I’ve always only sold options that I’ve had in the money. Of course sale of an option is income and will be taxed as such (assuming it’s been held <1 year). Now, for the first time, I’d like to exercise call options to increase my equity position in the underlying stock. I can’t imagine that it would be the case, but I don’t get taxed on this exercise because it’s not a gain, right? I’m just buying the stock at a contracted strike price. Would be absurd if I was taxed on the buy only to be later taxed again on the eventual sale.

11

When you exercise a long call to buy the underlying, your cost basis of the stock is the premium paid for the call plus the strike price. Your gain will be long term or short term depending on your holding period for the underlying stock.

However, you are taxed if you sell the call prior to expiration or it expires worthless.

See page 58 of IRS Publication 550 for details on how options are handled.

4
  • I don't understand--why would you be taxed for an option that expires un-exercised?
    – Tiercelet
    Jan 11 at 17:02
  • If you buy an option and then later you sell it then you have a capital gain or a capital loss. If instead it expires then expiration is equivalent to selling to close (at zero) and again, you have a capital gain or a capital loss. The same holds true for short options except that the transaction order is reversed. Only exercise of the option folds its cost into the acquisition of the underlying. Jan 11 at 18:03
  • @BobBaerker this may be an obvious question, but the effective date of purchase of the underlying (for capital gains tax purposes) is the date of the exercise, not the date of the purchase of the option, correct?
    – Runeaway3
    Jan 17 at 20:17
  • @Runeaway3 - Yes, the acquisition date for the underlying would be the exercise date of the option. Jan 17 at 20:50
2

It should not - what it SHOULD do is give you a cost base of strike price + cost of option.

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