So let me get this straight. You think that Dr. Bunting buys Convertible Notes in a Private Placement on March 30th but gets cold feet three days later on April 2nd. His feet are so cold that he decides to put up even more money????? to convert his warrants into stock. The only way that would make any sense at all is if the stock could be sold immediately. But of course everyone (well almost everyone) knows that all of those shares can't be registered and sold for 6 months.
On the other hand, if a savvy investor is anticipating a substantial increase in the underlying stock of his derivative holdings, he knows that he can save a boat lot of taxes by foregoing the "free look period" converting early thereby keeping the "bargain element" of his cost basis as low as possible.
To better help you understand this, Pumper, here is an earlier post of mine on that subject.
As I See It Tuesday, 10/03/17 09:40:56 AM
Re: alkalinesolution1 post# 42079 0
Post # of 44111
Yes, the bargain element applies to warrants.
From Zacks:
Quote:When you exercise warrants to buy the underlying stock, you pay the stated strike price to the issuing company. The difference between the strike price and the price of a share, minus the cost basis, is taxable income. Suppose you exercise warrants with a strike price of $30 per share to buy 100 shares of XY Company and you originally paid $500 for the warrants. Your total investment is thus $3,500. If the market price on the day of exercise is $50, the stock is worth $5,000 and the difference is $1,500. This $1,500 is taxable as ordinary income in the year of exercise. It is not a capital gain because you did not own the shares prior to exercising the warrants.
It should be noted that the "bargain element" tax is due in the year of exercise not when the stock is eventually sold. This is another reason why those that are exercising early are likely to be really confident about the stock's near term future.
