Stock warrants are similar to stock options except for two major differences: they are issued by the corporation itself and they are longer-term than options (up to 15 years.)
Warrants are considered a common stock equivalent and often trade in the public markets (if they are registered by the company with the SEC.) Sometimes warrants are paired with common stock and trade as a unit.
An example is the American International Group warrant which trades as ticker symbol AIGWS. It has a subscription price of $45 and will expire 1/19/2021. If AIG common shares ever trade at a price in the future higher than $45, the warrants will be "in the money." Owners of the warrants could exercise the warrant, pay $45 for new common shares, and then sell the shares in the public stock market for a gain.
How do you determine the cost basis of your warrant? If you bought it, it is the purchase price. If you received it from the company, the tax opinion filed with the SEC for the warrant distribution or posted on the company website will tell you which method to use. The three usual methods are:
1. Taxable. The fair market value of the warrants on the date of distribution will be declared as taxable income on your Form 1099 at year-end and this amount becomes your cost basis. 2. Tax-Free. The warrants are not current taxable income. Your cost basis in the warrants is determined by allocating your cost basis in the original stock between the original stock and the new warrants based on the relative market values on the first day of separate trading.
3. Return of Capital. The cost basis of the warrants is the fair market value on the date of distribution, but it is not taxable income. The warrant cost basis amount is recorded as a reduction of your cost basis in the parent stock as a non-dividend distribution.
The tax-free method also applies when units of common stock plus warrants are separated. This is often done close to the expiration date so that the common stock will trade by itself without an expired warrant attached. Your existing cost basis for the unit is allocated between the common stock and the warrant based on relative market values on the first day of separate trading.
If the market value of the warrants is less than 15% of the total market value, allocation of the cost basis is optional. An "out-of-the-money" warrant near expiration will have little value and can usually be ignored.
You can use our stock warrant calculator to compute your cost basis by clicking on the calculator picture above. It has pre-filled values for the AIG warrants.
Information provided is intended solely for cash-basis U.S. citizen individual taxpayers and is believed to be accurate for most cases but is not guaranteed. Always consult your personal tax advisor about your own situation. Suggestions are most welcome. Please email our webmaster @ costbasis.com with your comments. If this website has been helpful to you, please consider making a donation to support our efforts.