The Motley Fool Discussion Boards

Previous Page

Financial Planning / Tax Strategies

URL:  http://boards.fool.com/mark-yesbut-a-few-points-of-clarification-30979018.aspx

Subject:  Re: Taxes on Company Options Date:  11/17/2013  1:29 AM
Author:  BruceCM Number:  119538 of 121219

Mark
Yes...but a few points of clarification:

Company granted options have no value so you cannot sell them. Once the options vest to you, you may elect to exercise them...meaning you purchase the stock for no more than the option price. But first....

....What kind of options are these, as you need to know this to determine the tax treatment. There are 3 possibilities...

Employee Stock Purchase Plan Options that you buy from $$ you contribute to an account. With these, the option price can vary to the lesser of the fair value of the stock on the date of the option grant or the fair value on the date the options are exercised, or the stock price on some date in between. They also come with an employer discount of usually 5 to 15%. If you exercise and sell, the bargain element (the 'spread' between the option price and the fair value on the date of exercise) will be ordinary W2 income, as will the discount. But if you hold the exercised stock at least one year past exercise date AND at least 2 years past the option grant date, the bargain element will be treated as long term capital gains but the discount will forever be ordinary income when the shares are sold....even after you die.

If these are Incentive Stock Options (ISOs), the same tax rules apply EXCEPT the option price is the fair value of the stock on the option grant date, the options are usually vested to you over a few years, there is no discount and you've got to pay for them with your own savings. If you hold the stock, the bargain element will not be treated as ordinary W2 income, but it will be reportable income for alternative tax purposes.

If these are non-qualified (actually, non-statutory) stock options, once exercised, the bargain element is ordinary W2 income, there is no discount and there is no stock holding period for favorable capital gains tax treatment.

With ISOs and non-quals, you must come up with the $$ to purchase the stock at exercise, whether you elect to hold the stock shares or immediately sell them. One way to avoid having to come up with the necessary cash to make the buy is to do a 'cash-less' exercise, wherein the broker will exercise and then sell enough shares to buy the exercised shares, pay transaction fees and to withhold enough for tax. They have software that enables them to do this. In my experience, this is the preferred method for those who have a significant bargain element AND who wish to hold their company stock.

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