When Does My Capital Gains Holding Period Start For Warrant Shares?

 

Q: When does my capital gains holding period start for shares acquired upon exercise of a warrant I received from a company in connection with an investment or a loan (i.e., not a warrant issued in consideration for services)?

A: If you exercise your warrant by paying cash for the exercise price, your capital gains holding period does not start until you exercise your warrant.  (Unfortunately, there is some uncertainty as to whether the holding period starts on the day of the exercise of the warrant or the day after.  See here.) 

If you exercise your warrant in a cashless exercise, there is uncertainty as to the right answer.  Some taxpayers argue that the cashless exercise of a warrant is a recapitalization event itself entitling the taxpayer to tack their holding period back to the date of the acquisition of the warrant.  See the attached letter, in which the New York State Bar Association states:  “If a cashless exercise constitutes a recapitalization, the warrant holder’s holding period for the stock received upon exercise would generally include the holding period for the warrants.”

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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