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Strategies & Market Trends : Income Taxes and Record Keeping ( tax )
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To: Dan Duchardt who wrote (3084)3/22/2000 2:28:00 AM
From: Herschel Rubin  Read Replies (1) of 5810
 
Question on IRS view (short-term or long-term cap gain) when I exercise VERSUS sell in-the-money call options and receive shares in my account.

Several days/weeks prior to expiration, an in-the-money call contract will not only have intrinsic value, but time value and/or volatility premium.

However, if you decide to exercise the calls in advance of expiration, you essentially throw away the time value/volatiliy component of your premium and your broker deposits the intrinsic value (current price minus strike price) in your account and uses whatever cash available to buy the underlying stock for your account, corresponding to the options.

Therefore, it is to your advantage to essentially perform the exercise yourself by SELLING the call contracts to capture the premium, then BUYING the equivalent amount of shares of the underlying stock (that were controlled by the call contracts) on the same day.

But the question is: Does the IRS views the "do-it-yourself" exercise as a short-term capital gain taxable event versus a "brokerage-handled exercise" which establishes a position that you may hold for long term capital gains tax treatment?

Anybody have any experience with this? Comments appreciated!
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