Tax on (1) Sale or (2) Exercise of Call Option?

Question

On Jan 3, 2013 I buy call options on stock A which expire on Jan 18,

2014. I have two possibilities:

On Jan 5, 2014, I sell the options at a profit and the profit is treated as a Long Term Capital Gain for the tax year 2014. Is that correct? I assume the answer is "Yes"
On Jan 5, 2014, I exercise my right to purchase Stock A at the call price and I now own the stock. I hold the stock for many years. I assume that there is no tax due for 2014 and the tax won't be due until I sell the stock. Is that correct?

Example:

Jan 3 2013 - Purchased an option for stock A with a strike of $45 for $10.

Jan 5 2014 - Exercised right to purchase stock A and paid $45

Sometime in the future I sell stock A for $75. My basis is $45 + $10 $55 and my long term capital gain = 75-55=$20. Is that correct?

In the above example what is the date of my basis - Jan 3 2013 or Jan 5

2014?

Arthur Kamlet · Accepted Answer

I am not sure if the dates you show are possible. Options with terms over

9 months or so are known as LEAPs and have only two dates during a year to expire. But let's say this is a possible option.

Let's say yes,

Yes.

The date follows the underlying stock and not the option buy date.

njoracle · Answer

===snipped==Thanks for the response. Yes it is a LEAP but I'm not sure I understand "only two dates during a year to expire". I purchased the LEAP on Jan 3, 2013 which is set to expire on Jan 18, 2014. I thought Jan 18, 2014 is the only expiration date. What would be the second expiration date?

Arthur Kamlet · Answer

There may be a different series of LEAPs with a July exp date.

NJOracle · Answer

According to the Options Industry Council all equity LEAPS expire in January. See

Tax on (1) Sale or (2) Exercise of Call Option?

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