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Looking for some assistance from you tax guys. On the Lucent Technologies message board, and individual asked about tax implications on exercising company options that were given to him. There are two different views on what happens tax-wise. Anybody here know a little bit more about this. Here were the responses to his questions (LU board message #794):
From KnowledgeSeeker:
<< As you said, your options are exercisable in '99. If I am right, these company options
should allow you to purchase a certain amount of the company stock (Lucent) in '99 at a
stated strike price. The receipt of these options given by your company should have been
taxed at your ordinary income rate in the year recieved. You do not incur a capital gains tax
liability until you actually sell this stock in the open market at the fair market value. The
period that you hold this stock from the time you exercised the option to the time you sold
the stock at the FMV will determine the capital gains rate at which you will be taxed
(20%-long term, or 28%-short term). So, if you were to exercise in '99 it would be like you
just bought LU stock; if you immediately sold the stock, the gain received (fmv-strike
price)would be taxed at the higher rate of 28%; if you wait > 18 months before you sell, then
you will be taxed at the lower capital gains rate of 20%. >>

From EvanW:
<<I don't think the above is quite correct, but again, I'm not a tax professional. However, I'll state
what I do know from first-hand experience with non-qualified employee stock options. When the
grant is issued, there may be tax liability as ordinary income; I don't remember. When the grant is
exercised, there is a tax liability on the difference between the strike price of the option and the
FMV of the stock on the exercise date. Any gain here is taxed as ordinary income. You do get a
new cost basis in the stock at the exercise date and at the exercise price. From that point on any
gain is taxed at the appropriate cap gains rate.>>

So whats the deal? What do you think? Respond here, or on the Lucent Board.
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