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I posted following note on "Ask a Foolish Question":
I execrised three contracts for XYZ
(automatically) on expiration date.

Of these three, 2 were bought for strike price
say 60 and the third for strike price 80. The cost
of option (premium) was different for each purchase.
All 3 contracts had SAME expiration date.

Of the 300 common stock that I have now,
200 have cost basis of 70 (60 + 10 for premium)
100 have cost basis of 100 (80 + 20 for premium).

I wish to sell 100 stocks now. Since all 300 I
have were bought on same day (I cannot use FIFO),
what is my cost basis for the purpose of capital
gains calculation?

TMF Karen suggested that I check the FAQ on Taxes board
and then post a question there. I checked the FAQ and
the information I got there is I believe incorrect.
I sent a note to TMF Karen again but was requested
again to post the message here. Following is my note
to TMF Karen:
Dear TMFKaren

You suggested me to check the Taxes message board
on my question regarding the option exersizing and
cost basis. (Ask A Foolish Question)

I checked the Taxes FAQ (Investment Issues, Stock Options)
I am not very sure if the information in that post is correct.
It says that when one exersizes an option, the difference between
the price paid for the contract and the fair value of the stock on
that day is Capital gain. And is taxed immediately.

I found contrary information on IRS's website.
Here is the link:

The page is quiet long. Look for "Calls and Puts"
and click on the link for Table 4.1 which summarizes
that section.

In my case, since I exersized the call options I bought,
the price I paid for those contract should be added to the
price I paid for the stock when I exercised it. (The strike price
+ option price) is my cost basis.

My question was due to the fact that I exercised TWO separate
contracts with same expiration date but different strike price and
option price on SAME day.

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