Series 7 practice questionmediumOptions — Tax Treatment
When a call option is exercised, how is the premium treated for tax purposes for the buyer?
- AIt is recognized as a capital gain
- BIt is added to the cost basis of the stock acquired✓ Correct answer
- CIt is deducted as an investment expense
- DIt has no tax consequence
Explanation
Why B — It is added to the cost basis of the stock acquired
When a call buyer exercises the option, the premium paid is added to the strike price to determine the cost basis of the stock acquired. For example, if the strike is $50 and the premium was $3, the cost basis of the stock is $53 per share. No gain or loss is recognized at the time of exercise.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 755+ Series 7 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Related Investment Information & Recommendations questions
- An investor who buys stock and simultaneously buys a protective put exercises the put. How is the premium treated?
- When a listed equity option expires unexercised, the premium paid by the buyer is treated for tax purposes as:
- The Options Clearing Corporation (OCC) serves which primary function?
- An investor writes 1 GHI Sep 50 call at $4 and writes 1 GHI Sep 50 put at $3. At expiration, GHI is at $42. What is the…