How to Account for Stock Warrants

Buy Strength and Sell Weakness

Stock warrants resemble options in that they represent the right but not the requirement to buy a stock in the future at a price set today. The exercise price in the future is called the strike price and represents the price point at which your warrant increases dollar for dollar with the stock price. Warrants give the investor considerable leverage while the terms of the investment usually extend several years from the time of issuance.

Things You'll Need

• pocket calculator
• spreadsheet program

Instructions

1. Know that a stock warrant gives the investor the right but not the obligation to purchase stock of a company, either public or private, at any time at the warrant holder's option. The warrant may have an expiration date or the issuer may have the ability to call the warrant with sufficient notice. Warrants usually are of intermediate length with terms that exist for a two to five years. Warrants are issued directly by the company. Options are issued by the exchange the option trades on.

2. Study. Because warrants represent a taxable event that may or may not occur, accounting for warrants requires some study. The investor must note at the time of purchase the strike price and the premium of the option value. Strike price represents the minimum price that the stock must reach in order to qualify to be called. The premium is the difference between the stock price and the price the investor paid for the stock.

3. Buy warrants and note the purchase date, the number of warrants, purchase price, strike price and premium in each column on a spreadsheet. Note elsewhere the terms under which the warrant may be exercised. There is no annual reporting of income, amortization or accrual of discount required for tax purposes until there is a taxable event.

4. Choose to sell the warrant or exercise the warrant by paying the amount of the strike price for each share of stock represented by the warrant. Sell the warrant and note the proceeds per warrant on the spreadsheet. Subtract the cost of the warrant from the sales price of the warrant. This is your taxable income per warrant. Make certain that the stock has not split giving you more shares per warrant. Note the date of the warrant purchase and see if it qualifies for short term or long term capital gains.

5. Avoid capital gains tax by paying the strike price and keep the stock. Note that your adjusted cost for the stock becomes the strike price plus what you paid for the warrant. This will reduce capital gains if and when you decide to sell the stock. When you sell the stock simply compare the adjusted cost of the stock to the market price. The difference will be your taxable income. Tax rates, again, will vary depending on the length of purchase, the state in which you reside, and your appropriate tax situation.

Tips & Warnings

• Warrants may be issued for each share or some number of shares per warrant.

• If you choose to exercise the warrant your strike price payment must be completed by the due date otherwise the warrant will expire worthless.

References

• What are Warrants?

Resources

• Definition of a Warrant