How does a stock option offered to an employee differ from a stock warrant acquired by an investor?
The tax rules of a compensatory stock option are very different from those of an investor warrant. Grants of options for services are governed by Section 83 of the Internal Revenue Code. As such, stock options are not taxable until exercised. At that time, the employer is entitled to a corresponding tax deduction.
Warrants are not granted for providing future services to the company. Instead, warrants are granted as part of a package of rights negotiated between a company and its financiers or between two companies in connection with a business combination. Warrants are not taxed at exercise. Rather, the warrant-holder pays capital gains taxes on any appreciation at the time of the sale of the converted stock.