By Kaye A. Thomas
Current as of January 7, 2015
How to determine your basis and holding period when you exercise an option.
This page explains how to determine your initial basis and holding period when you acquire stock in connection with the exercise of an option. It covers situations where you exercise an option to buy stock (a call option), and also where someone else exercises an option to sell stock to you (a put option). We’ll discuss these types of options:
- Options you receive because you provide services (as an employee, director, consultant, etc.). These options are discussed in more detail in our Guide to Compensation in Stock and Options — and in our book, Consider Your Options.
- Options you buy or sell through a broker.
Options you receive for services
One way to acquire stock is by exercising an option you received for services. Many companies provide options to executives and other key employees, and some grant them more broadly.
Compensatory options can be incentive stock options (“ISOs”) or nonqualified options (“NQOs”). Here are the steps in determining your basis for stock received from these options:
- First, make sure you know whether your option is an ISO or NQO.
- If you exercised a nonqualified option, see Stock from Nonqualified Options.
- If you exercised an incentive stock option, see Stock from ISOs.
Options you bought or sold through a broker
We’re concerned here with two different ways you may acquire stock: you buy a call option through a broker and later exercise that option, or you sell a put option through a broker and later are required to buy the stock when someone exercises the put.
Exercise of a call option
If you buy a call option through a broker, you may acquire stock by exercising the option. If so, your initial basis for the stock includes (a) the amount you paid to buy the option, plus (b) the amount you paid to exercise the option, in each case including any commission or other costs of the transaction.
Example: You pay $375 plus a $35 commission to buy a December call option on XYZ at a strike price of $40. Later, when XYZ is trading at $50, you exercise the option, paying $4,000 to buy 100 shares. Your basis for the shares is $4,410 ($375 paid to buy the option plus the $35 commission plus the $4,000 exercise price).
Your holding period begins when you acquire the stock; it does not include the period in which you held the option.
Exercise of a put option
If you sell a put option, you may acquire stock when the holder of the put option exercises. In this case your basis for the stock you acquire is equal to the purchase price of the stock, decreased by the amount you received when you sold the put option, and increased by any commissions or other transaction costs.
Your holding period begins when you acquire the stock.