Can I Exercise My Stock Options in My IRA?

What a week!

First, the Nasdaq announced on Valentine's Day that the Nasdaq 100 tracking stock (QQQ) would split 2-for-1 on March 17. Although there are no tax implications to this split, the American Stock Exchange, where the QQQ trades, recommends that shareholders keep track of their original cost basis in the shares.

Then on Wednesday, hrblock.com shut down the online tax-preparation section of its Web site for the second time this season. We'll update you on that saga.

We'll also discuss whether you can pay the cost of exercising your stock options with money from your IRA, and we'll check out how to handle warrant trades.

Less than two months left until tax day, so send your questions to [e-mail]. Please include your full name.

Can My IRA Exercise My Options?

I hopefully have a simple question. I have stock options in my company, which has done very well. Can I exercise these options with money contained in my IRA, and then not have to pay tax when I actually sell them?

-- Sumner Blount

Sumner,

No, because the options were issued to you, not your IRA. You have to exercise them, and you can't transfer securities to your IRA, just cash.

So when you sell the shares, you'll be liable for taxes on any gains.

Ask your tax questions on the TSC Tax Forum board

If you need money to pay the exercise price on your options, you can consider a temporary withdrawal from you IRA. But you might need to quickly sell the underlying shares.

If you take money out of your IRA, you have 60 days to return it to avoid any tax or penalty hits, says Bill Fleming, director of personal financial services for PricewaterhouseCoopers in Hartford, Conn. But be very careful. If you're a day late, you'll owe tax on the withdrawal and a 10% penalty for early withdrawal (assuming you're not 59 1/2).

Before you go through this exercise, check with the administrator of your options plan to see if you can do a "cashless" exercise. This allows you to exercise your options without laying out any cash, as long as you immediately sell enough shares to pay the exercise cost.

How Do Warrants Work?

Last March I purchased some warrants in a company. The warrants were called this past January and I redeemed them for shares by paying $5.50 each. What are the long-term capital gains rules for this? If I hold the shares past the one-year date from when I purchased the warrants, is this a long-term capital gain?

Also, if I own options in a stock that I exercise, what is the date I use for long-term gain calculation? Is it the date I exercised or the date I bought the options? If I read Publication 550 - Investment Income and Expenses correctly, it's the date I exercised.

-- G.K. Warren

G.K.,

For tax purposes, warrants are treated just like options. They are certificates, generally issued with bonds or preferred stock, that entitle the holder to buy a specific number of common stock at a specific price, usually above the current market price. Warrants have their own holding period and are publicly traded, so you can have a long-term gain on the sale of warrants themselves.

When a warrant is exercised or called, the stock received has a holding period that begins the date the warrant was exercised. You must hold the stock one year from the date it was called to qualify for the long-term capital gains rate, says Ted Tesser, trader tax specialist and author of The Trader's Tax Solution.

As for your second question, the holding period of the stock you got as a result of an option being exercised begins the day after the exercise. Congratulations, you read that tome, Publication 550, correctly.

hrblock.com Down Again

The online tax preparation section of hrblock.com shut down again on Wednesday for the second time.

As we previously reported, the tax section of the site initially went down at the end of January because it couldn't handle the volume of users since its Jan. 21 launch.

This time, the company shut down the site because clients' data were appearing in other clients' files.

"Only 10 of the 300,000 users currently are known to be affected by this glitch, but the number can climb to 50," H&R Block spokesman Neil Getzlow said.

Getzlow says the problem stemmed from a bug in a recent software update that was installed to make system go faster.

"Once the company is confident that there are no more problems -- which we hope is this weekend -- the site will go back up," he continued.

As it did during the last outage, hrblock.com is offering free downloads of TaxCut, the tax-filing software program produced by H&R Block's software arm, Block Financial. As for taxpayers who had already started preparing their returns on hrblock.com, the information is safe and secured, according to Getzlow. "So when the site is up they can come back and finish," he said.

You think they'll come back after all this?

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