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Tax question
Old 08-03-2006, 08:20 AM   #1
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Tax question

A random tax question for you:

I bought an option on a stock. This is an exchange-traded option not connected in any way with employee compensation. I am considering exercising this option and holding the underlying stock for an indefinate amount of time. For the purposes of my question, I paid $.80 a share for the option and the strike price is $10. Questions:

- If I exercise the option, do I owe cap gains on the difference between what I paid for the option and what it was worth when I exercised? I think the answer is no.

- I believe that I pay no cap gains taxes until I sell the underlying stock, at which point my basis will be $10 plus $.80, or $10.80. Is this correct?

- To get LTCG treatment on the underlying stock, I have to hold it for a year and a day. Does the clock start ticking from the day I bought the option otr the day I exercised and bought the underlying stock?
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Re: Tax question
Old 08-03-2006, 08:34 AM   #2
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Re: Tax question

1. When you exercise a call option the price you paid for the option is added to your basis in the stock

2. You will pay no capital gains taxes until you sell the underlying stock

3. The clock starts ticking on your LTCG treatment WHEN YOU EXERCISE the IRS considers the option a separate security.

If you would like to double check my answer, please see revenue ruling (78-182)

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Re: Tax question
Old 08-03-2006, 08:44 AM   #3
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Re: Tax question

Thanks, saluki. That's about what I thought.
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