A stock warrant is a company-issued contract that gives individuals the right to buy a company's stock at a set price during a specific period of time, usually years. Companies often issue warrants when they need to raise capital for new projects, or they may be entering bankruptcy. For tax purposes, the exercise of a stock warrant can have two possible outcomes depending on whether the warrants were issued as compensation for services or not.

IRC section 83(a) provides that when property is transferred in connection with the performance of past, present, or future services, the excess of the fair market value of the property over the amount paid is includible as compensation in the gross income of the taxpayer that performed the services. IRC section 83 only applies if warrants are issued in connection with services. “Services” for these purposes usually connotes an act performed by an employee or independent contractor rather than “aid” lent to the company by a shareholder.

Revenue Ruling 78-182 appears to apply in situations where a warrant is not obtained in connection with the performance of services. This ruling provides that the holder of a warrant recognizes no income on the receipt of stock in exchange for the warrant upon exercise. Instead, the holder's basis in the warrant is added to the exercise price to determine his basis in the stock received upon exercise.