IRS Tax Implication - Exercise ITM Calls

[Bobby T]

Hopefully someone here knows the answer...

Say a stock is trading at $100, and I buy a call option with strike of $20 (let's pretend the premium was $81) and I immediately exercise with the intention to hold stock long term.

Which of these scenarios is most accurate from a tax perspective:

1. Short term loss of $81 on the option and a cost basis in the stock at $20 (i.e., $80 unrealized gain).
2. Cost basis in the stock at $101 with a $0 short term loss.
3. Cost basis in the stock at $101 with a $1 short term loss.
4. Other??

Thanks in advance,
Bobby

 

[ajacobson]

$101 cost basis - taxable event when you sell the stock. Exercise just adjusts your basis. Read IRS form 550. Don't confuse the treatment with the treatment of employee options.