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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1203  
Subject: Re: Employer provided bonus options Date: 6/25/2013 4:16 PM
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BritInCA,

This is probably the wrong board for your questions, though I'll take a stab at it.

You might want to re-post on the Employer-Granted Stock Options Board at http://boards.fool.com/employer-granted-stock-options-100161... It is pretty inactive, but this is what it is there for.

Also your questions are mostly tax-related, so cross-posting to the Tax Strategies Board http://boards.fool.com/tax-strategies-100155.aspx would be appropriate.

You wrote, I just exercised options that my employer gave me as a bonus as a buy and hold transaction. I had to cover (some) taxes on the spread.

I understand that the spread is the difference between the option price set by the employer and the closing price of the day. But what is my cost basis for those options when I sell after holding for the long term? Is it
a) The price I paid for them, or
b) The closing price of the transaction day, or
c) something else?

My options were priced at 13.00, and the transaction day's closing price was 37.00
Tax paid appears to have been 25% * (37 - 13) = $6 per share.


Cost basis is used primarily to establish how much you profited for the purposes of collecting taxes. Therefore, if you paid $13/share and paid taxes on the difference, your cost basis in the future will be $37 because you've already paid taxes on the profit you (theoretically) made today.

With that said, the 25% ($6/share) is probably just an estimate. It is very likely NOT your final tax bill. The amount you pay will be based on the marginal tax bracket for your 2013 tax filing and this could be higher than 25% - part because of this transaction. You could also owe additional state taxes, depending on where you live. 25% is just the typical withholding amount companies hold back for taxes on bonuses. That will count toward the amount you paid in federal taxes when you file next year.

BTW, a large exercise could result in ATM (Alternative Minimum Tax). Unfortunately I'm not that familiar with how ATM gets computed - only that it tends to affect individuals with substantial stock awards. I suspect in your case, it won't have much effect since this was an NQO and you already have to pay at your marginal rate. I suspect that ATM was actually intended to hit people that have a lot of capital gains or qualified dividends; but I also wouldn't be surprised if the IRS sends you a supplemental tax bill because of ATM.

Finally, Also they were non-qualified options. What does that mean? What is a qualified option?

Qualified incentive stock options (ISOs) are ones that enjoy special tax treatment when exercised. You get to treat the options you exercised as having been held from the date they vested, which could mean a 15% tax rate on your gains. However an ISO plan has to meet certain tests to receive such a treatment.

- Joel
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