The Motley Fool Discussion Boards

Previous Page

Financial Planning / Tax Strategies

URL:  http://boards.fool.com/stock-option-strategies-10128644.aspx

Subject:  Stock Option Strategies Date:  3/14/1998  8:11 PM
Author:  Sandblster Number:  2674 of 121446

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.

Copyright 1996-2014 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us