The Motley Fool Discussion Boards
Financial Planning / Tax Strategies
|Subject: Stock Option Strategies||Date: 3/14/1998 8:11 PM|
|Author: Sandblster||Number: 2674 of 120446|
I just read the Q&A on nonqualifed stock options. It made me wonder if the tax laws do not provide and incentive to exercise options sooner rather than later.
Consider the following example:
Suppose I am granted an option to buy 5000 shares of my company's stock for $10.
Three years later, the stock is selling for $20.
Suppose I exercise the options and sell the stock three years after the options are granted. My total tax bill--assuming that I am in the highest tax bracket--is $19800.
If I had exercised the options as soon as possible, say after one year, when the price was $13, my tax bill would be much lower:
.396*3*5000 + .2*7*5000 = $12940.
This is a big difference! The incentive to exercise options sooner was sweetened when the capital gains tax rate was cut last year.
I understand that there are other considerations, mainly that you have no downside risk with options, but you do with stock.
Nevertheless, I have never seen any articles that mention the effect I described above.
Any thoughts on this would be welcome.
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