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| Caution: Always check current tax laws with your local tax attorney, CPA, or financial planner before making any investment changes or decisions. This website does not provide legal advise. The content of this site is for informational purposes only. STOCK OPTIONS Stock Options - the right to purchase a specific number of shares of common stock at a stated price. This right lasts for a fixed period. The buying price is called the exercise or strike price. If the market price for those shares is higher than the exercise price, you can exercise your option, then sell at a profit know as the bargain element. If the market price is lower, your options are worthless. Unexercised options expire after a period of time, as prescribed in the stock option plan. STOCK OPTIONS TAX CONSEQUENCES Nonqualified Stock Options (NSO) - When a NSO is received or granted there is no tax to pay or nothing to report. You have to report taxable income at the time you exercise the option to buy stock. When you exercise your option you pay income tax or report compensation income equal to the bargain element (the difference between the FMV of the stock and the amount you paid for it). When you sell if you have owned the stocks for more than a year you pay capital gains taxes - less than a year you pay income taxes. If you sell for less than the price you paid, you will have a tax savings loss. Two ways to look at when to exercise NSO's. (1) Wait to exercise as long as possible because stocks historically increase in valve over time. By waiting, you could benefit from the stock's appreciation without investing any cash to exercise the option, At the same time, you avoid risk if the price should plummet. (2) but if you exercise the option sooner (especially if you plan to hold on to the stock and if you are assuming the shares will go up in valve over time, buying the stock sooner lets you minimize the spread that is taxed as ordinary income and maximizes the appreciation that will earn long-term -gains-treatment if you hold the stock for more than a year. Caution though, starting the capital-gains clock ticking also means you risk a loss. Incentive Stock Options (ISO) - you do not owe tax, on the spread, when you exercise your right to buy shares. If you hold the stock option at least a year (and until at least 2 years have passed after the option grant date), all the gain is taxed at the long-term capital-gains rate. If ISO stock is sold before the end of the minimum holding period, the recipient has a disqualifying distribution (ordinary income tax rates apply to the bargain element in disqualifying distributions). *Caution, ISO's can trigger the Alternative Minimum Tax (AMT) because the spread is considered income for AMT purposes. When you pay AMT because you exercised ISO's that amount becomes a credit that you can use to offset regular income taxes in future years. If you exercise ISO's this year and it looks like the AMT tax will be larger than your regular income tax you can sell your ISO's before the end of the year. This will in a way convert your ISO's to NSO's. The bargain element is added to your income for your alternative minimum tax calculation. The option price cannot be less than the Fair Market Value of the stock at the time the ISO is received and it must be exercisable within 10 years from receipt. Other options: sell your stock option and use the money to diversify your investments. Another way out of the AMT if it is higher than your regular income tax is if you own both NSO's and ISO's. You might try exercising your NSO's to push you into a higher regular income-tax bill and if it passes the AMT tax bill, you'll pay the regular tax bill. You'll pay more tax but you'll cover the tax liability on the NSO's that would come later. And this maneuver preserves your right to precious tax deductions, such as property taxes, state income taxes, and personal exemptions that don't apply against the AMT. *The difference between the stock value and the option price is a "plus" adjustment under the AMT rules. Click here for a thought provoking article titled " Nonqualified option timing strategy". Should you exercise nonqualified stock options before you're ready to cash out? Click here for an article that might help you decide when to exercise your options. Click here for a detailed article with additional information about stock options. To 83b or not to 83b. By the way, what is an 83b???? Click here for an in depth article explaining the 83b election. CNNmoney's options calculator Smart Money's options calculator Home |
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