A stock warrant is similar to a stock option in that both give you the right to purchase shares of the stock at a guaranteed strike price and you are able to exercise this right for a limited time. However, warrants are issued by a company for its own stock and are usually good for several years.
Options are contracts sold by parties unrelated to the company and typically have expiration dates of a few months. The taxation of stock warrants is much like that of stock options, but there are some differences. In some cases, the stock or bond and the warrant are sold as a package deal, and part of the price is allocated to the warrant by the terms of the sale.
This allocated amount is an investment and is a nontaxable cost basis. Alternatively, you might buy a stock warrant on the market.
In this case, the premium you pay for the warrant is your cost basis. When you exercise warrants to buy the underlying stock, you pay the stated strike price to the issuing company. The difference between the strike price and the price of a share, minus the cost basis, is taxable income. It is not a capital gain because you did not own the shares prior to exercising the warrants. You can sell the shares you acquire by exercising stock warrants immediately.
If instead you decide to hold on to the stock, the exercise price becomes your cost basis. Any further gains or losses are capital gains or losses. If you sell the shares one year or less from the date of exercise, you have a short-term capital gain or loss that is taxable as ordinary income at the same rate as your other income such as wages or salary.
Long-term gains are taxed at a maximum rate of 15 percent as of Employee stock options are actually stock warrants, despite the name. Most ESOs are nonqualified stock options issued to employees as an incentive or reward.
When an employee exercises a nonqualified stock option, the difference between the strike price and the market price on the day of exercise is called the bargain element. The bargain element is taxed as ordinary income and is subject to payroll tax withholding, including income taxes as well as Social Security and Medicare taxes.
A second type of ESO, incentive stock options, operates under a special set of rules that allow the bargain element to be treated as a long-term capital gain, rather than as compensation. If you are given ISOs, you have to wait at least a year to exercise them and then hold the stock for one more year before the bargain element is eligible for this tax break. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University.
He became a member of the Society of Professional Journalists in At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors.
This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. These returns cover a period from and were examined and attested by Baker Tilly, an independent accounting firm. Visit performance for information about the performance numbers displayed above. Skip to main content. Tax at Exercise When you exercise warrants to buy the underlying stock, you pay the stated strike price to the issuing company.
Capital Gains and Losses You can sell the shares you acquire by exercising stock warrants immediately. Employee Stock Options Employee stock options are actually stock warrants, despite the name. Topic — Stock Options. Zacks Research is Reported On:More...