Call Option Exercise Tax Cost Basis Adjustment
An investor buys 1 XYZ Nov 60 Call at 4. Later, when XYZ is trading at $68, the investor exercises the call. For tax purposes, what is the cost basis of the 100 shares purchased?
When a call is exercised, the premium paid is added to the strike price to determine the tax cost basis of the acquired stock ($60 + $4 = $64).
Complete Analysis & Legal Rationale
IRS tax rules dictate that when a call option is exercised, the option premium paid is not a separate taxable event; rather, it is capitalized into the cost basis of the stock: Strike ($60) + Premium ($4) = $64 per share.
Mathematical Step-by-Step Derivation
- Step 1: Strike Price = $60.00.
- Step 2: Call Premium Paid = $4.00.
- Step 3: Adjusted Tax Cost Basis = $60.00 + $4.00 = $64.00.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Strike price + call premium paid = $64 cost basis.
Fails to include the premium paid, understating the cost basis.
Uses current market price instead of actual cost paid.
Subtracts the premium from strike, confusing call exercise with put exercise.
Official Standard: Option premium is added to strike price for long call exercise cost basis.