If you own a convertible preferred stock for a year, then after that year, you decide to convert that preferred stock to common stock and immediately sell it, is that common stock subject to long term capital gains or short term capital gains? Assuming stock is from the same issuer.
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Hi @Lonely_apricot_limpe - good question! Generally, the cost basis and holding period of the original preferred stock transfer over to the common stock position after exercise. In your example, it would result in long-term capital gains taxation.
As another example, let’s assume you buy 1 share of convertible preferred stock for $50. It is convertible into 5 shares of common stock. Assume you hold the preferred stock for 2 years, then convert it. You now have 5 shares of common stock with an overall cost basis of $50 (or $10 per share). The new position also maintains the same initial holding period (2 years). If you sold the shares at a gain, it would be taxed as a long-term capital gain.
Hope that helps!
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