7544 / How is the owner of a warrant taxed when the warrant is sold, exercised, or allowed to lapse?

Sale. If a warrant distributed in a nontaxable stock dividend is sold, the owner realizes a capital gain or loss to the extent of the difference between the tax basis in the warrant and the proceeds of the sale. (For the tax basis of a warrant acquired in a nontaxable stock dividend, see Q 7511.)² In determining the owner’s holding period for the warrant, the holding period of the stock with respect to which the dividend was paid is included.³ See Q 702 for the tax treatment of capital gain or loss.

If a warrant distributed in a taxable dividend (or acquired by purchase, gift, or inheritance) is sold, the owner realizes a capital gain or loss to the extent of the difference between the tax basis in the warrant and the proceeds of the sale. (For the tax basis of a warrant distributed in a taxable dividend, see Q 7503. For the tax basis of a warrant acquired by purchase, gift, or inheritance, see Q 692.)

Exercise. The owner of a warrant will not realize capital gain or loss on exercise of the warrant and purchase of the stock. However, for purposes of determining gain or loss on a subsequent sale or exchange of that stock, the tax basis of the warrant is added to the subscription price paid for the stock.⁴

Lapse. If allowed to expire without exercise (i.e., lapse), a warrant is deemed to have been sold on the date of lapse.⁵ The owner of the warrant will realize a loss only if the owner has a tax basis in the warrant. This occurs only when the owner acquired the warrant in a taxable stock dividend, or through purchase, gift, or inheritance. The basis of a warrant received in a nontaxable stock dividend is zero unless it is actually sold or exercised (see Q 7511).