Nearly all of the information that I can find online on option exercise and taxes are related to employee stock options, where you do get taxed on the gain (even if on paper) between the strike price and the FMV.
What is the tax treatment if I exercise an ITM option that I purchased on the open market?(Standard call option, 1 contract = 100 shares.)
As an example, assume that I purchased one July 2021 call option for stock XYZ at a strike price of $30, paying a premium of $3. Suppose the stock is now worth $50 and the option is trading around, let’s say, $20.
I can sell the option and capture a gain of $1700 (paying taxes appropriately as ST/LT depending on holding period.) What happens if instead I pay $3000 to exercise those shares? I now have 100 shares that are worth $5000, with my basis as $3300.
- Will I have to pay the taxes on the gain immediately like with ISOs or only when I dispose the shares?
- Will my ST/LT clock reset to the exercise date or does my option purchase date transfer over?