7543 / How is the acquisition of a stock warrant taxed? What is its tax basis?

If a warrant to acquire stock in the distributing corporation is acquired in a dividend distribution, taxation to the recipient-shareholder depends on whether the dividend is taxable or not (see Q 7509). If it is a nontaxable stock dividend, there is no immediate income taxation. See Q 7511 to determine the tax basis of a warrant acquired in a nontaxable stock dividend. If the dividend is taxable, it is treated as a dividend “in kind,” so that the amount that generally must be included in the recipient-shareholder’s income is the fair market value of the warrant on the date of distribution.¹ This is also the warrant’s tax basis (see Q 7503).

If a corporation distributes a warrant to acquire stock in another corporation, it is also taxed as a dividend in kind. The basis of the warrant to an individual shareholder is its fair market value, see Q 7503.

If a warrant is acquired through purchase, gift, or inheritance, there are no immediate income tax consequences. The tax basis of a warrant acquired in this manner is determined under general rules discussed in Q 692.

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1.   Treas. Reg. § 1.305-1(b).

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