Stock Warrants

<div class="Section1">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 (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7509">7509</a>). If it is a nontaxable stock dividend, there is no immediate income taxation. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7511">7511</a> 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 &ldquo;in kind,&rdquo; so that the amount that generally must be included in the recipient-shareholder&rsquo;s income is the fair market value of the warrant on the date of distribution.<a href="#_ftn1" name="_ftnref1">¹</a>&nbsp;This is also the warrant&rsquo;s tax basis (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7503">7503</a>).<div class="Section1"><br /> <br /> If a corporation distributes a warrant to acquire stock in another corporation, it is also taxed as a dividend in kind.&nbsp;The basis of the warrant to an individual shareholder is its fair market value, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7503">7503</a>.<br /> <br /> If a warrant is acquired through purchase, gift, or inheritance, there are no immediate income tax consequences.&nbsp;The tax basis of a warrant acquired in this manner is determined under general rules discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="692">692</a>.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.305-1(b).<br /> <br /> </div></div><br />

<div class="Section1">A stock warrant is an instrument issued by a corporation granting the owner the right to buy a certain amount of stock at a specified price, usually for a limited time. In the case of the holder, a stock warrant is generally treated like an option.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 1234; Rev. Rul. 56-406, 1956-2 CB 523.<br /> <br /> </div>

<div class="Section1">The sale, exercise, or lapse of a stock warrant is taxed in the same general manner as an unlisted call option.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> <em>Sale</em>. 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, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7511">7511</a>.)<a href="#_ftn2" name="_ftnref2">²</a> In determining the owner&rsquo;s holding period for the warrant, the holding period of the stock with respect to which the dividend was paid is included.<a href="#_ftn3" name="_ftnref3">³</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="702">702</a> for the tax treatment of capital gain or loss.<br /> <br /> 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, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7503">7503</a>. For the tax basis of a warrant acquired by purchase, gift, or inheritance, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="692">692</a>.)<br /> <br /> <em>Exercise</em>.&nbsp;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.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <em>Lapse</em>. If allowed to expire without exercise (i.e., lapse), a warrant is deemed to have been sold on the date of lapse.<a href="#_ftn5" name="_ftnref5">⁵</a>&nbsp;The owner of the warrant will realize a loss only if the owner has a tax basis in the warrant.&nbsp;This occurs only when the owner acquired the warrant in a taxable stock dividend, or through purchase, gift, or inheritance.&nbsp;The basis of a warrant received in a nontaxable stock dividend is zero unless it is actually sold or exercised (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7511">7511</a>).<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1234.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1234(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1223(5).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.307-1(b).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1234(a)(2).<br /> <br /> </div></div><br />