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.
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.