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Author: AliFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2049  
Subject: Exercising, Selling, Holding Date: 2/6/2008 2:04 AM
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Say my strike price was $10/share. My first batch vested one year in (12 months at once) and I exercised and sold immediately in a cashless transaction. I paid income tax (plus other taxes and transaction fees) on the difference between my strike price and the market value on the day I sold.

My next options started to vest monthly. I think where I screwed up is that I did not exercise them (and sell to cover) each month as they vested. But I've been sitting here thinking, I've got options vesting every month, and when I sell them, a year and a day after each batch vests, I will only pay 15% long term capital gains. I was wrong, wasn't I? (And this in spite of owning and reading Consider Your Options.)

Say the stock is now at $35/share. It's been more than a year since my month-13 options vested. If I exercise and sell now, I owe ***regular income tax (plus other taxes and transaction fees)*** on the difference between my strike price and the current market value of the stock... the $25/share it appreciated in the meantime. In other words, if I exercise and sell now, I don't pay 15% tax, I pay income tax and then some, don't I? OUCH!

But I have other choices. If I were to exercise, sell to cover, and hold starting NOW, I'd pay income and other taxes on the $25 per share appreciation, and capital gains tax on any additional appreciation -- short-term if I sell before a year and a day from NOW, long term if more than a year and a day from now. Of course, the stock price could also go down, in which case I'd still owe the taxes on the $25/share it appreciated between vesting and exercising, but I could also incur a loss ($3K per year of which might be deductible).

I guess I'm kicking myself because I thought I'd be taxed 15%, but it turns out that it will be more like 35% or 40% when all is said and done. But if I don't want to incur risk by holding EVEN LONGER, that's the choice I make, right? I think what I meant to do was exercise and sell-to-cover, then sell the rest after a year and a day. I'm kicking myself because I never did that, and in the meantime the stock did go up.

Thank you for any help or insight you can offer.

--AF
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