Tax Facts

7567 / How is an owner taxed if a call is exercised?

The owner of a call (whether listed or unlisted) will realize no taxable gain or loss on the exercise of the call option and the purchase of the underlying stock. However, for purposes of determining gain or loss in a subsequent sale or exchange of that stock, the option premium paid by the owner to acquire the call is added to the tax basis in the stock.1

Certain combinations of options, or options held contemporaneously with offsetting positions that have the effect of reducing both the taxpayer’s risk of loss and opportunity for gain, may trigger constructive sales treatment under IRC Section 1259 (see Q 7617 to Q 7621).

The contemporaneous holding of a call option and granting of a put option with respect to an equity interest in a pass-through entity may constitute a “constructive ownership transaction” under IRC Section 1260 (see Q 7622 and Q 7623).

1.   Rev. Rul. 78-182, 1978-1 CB 265.

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