All posts tagged Warrants

What Is the Difference Between Warrants and Options?

by Joe Wallin on December 16, 2009 in Uncategorized with 1 Comment

Warrants and stock options are similar in that they are both contractual rights to buy stock of a company, at a price fixed in the contract, and for the period specified in the contract.

However, warrants and options are typically thought of differently for tax reasons. Stock options are typically associated with compensatory services, and warrants are typically associated with investment transactions.

For example, a consultant would typically receive stock options, and an investor in a convertible note and warrant round would typically receive warrants.

The reason for this is that the tax treatment of a compensatory stock option is dramatically different from the tax treatment of a warrant received by an investor in connection with an investment.

I am frequently asked the following question:  Can a service provider receive a warrant in connection with the provision of services?

The short answer is yes, but it is important to keep in mind that a warrant received in connection with the performance of services will be taxed just like a compensatory stock option. 

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

by Joe Wallin on May 28, 2009 in Uncategorized with No comments

 

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.”