HIA, Thanks for your input...
I e-mailed the same question to the IRS and their people couldn't answer properly. Normally a real person replies by e-mail from the IRS site, but this person included links to the IRS pubs and that's it! The IRS pubs do NOT address this question. It seems the IRS doesn't have staff who understand the esoteric aspects of options and their tax ramifications.
You are correct that no one would want to exercise call options that have additional premium associated with them if they could sell them to the market to capture that premium as well as the intrinsic value.
But, in the case of someone who needs long-term capital gains, the exercise of the option can actually be better (taxwise) than losing that extra premium.
At any rate, if the IRS treats what I term a "self-exercise" (selling the call option and buying the equivalent number of shares controlled by the call) as a short-term capital gains taxable event, yet the broker-exercise will permit a long-term capital gains holding, it doesn't seem logical.
Correct me if I am wrong, but as I understand it, when you exercise a call option, there are TWO transactions that must occur on the brokerage side of things:
1) The broker causes the option to be either sold on the market or the call option contracts are closed out. That's the first transation.
2) THEN an equivalent number of shares are bought for your account. Your account is debited the full amount for the the cost of the shares. This purchase of the shares is the second transaction.
Often, most options holders don't have enough cash in their accounts to buy the total number of shares controlled by their options - for example, if you owned 100 call contracts, you must buy 100,000 share of the underlying stock.
Or is the process of 'closing the call option position' and having to ante up more dough to actually buy all those shares not really a transaction in the eyes of the IRS?
Comments appreciated. |
