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Author: MTBnd Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Feels Like a Wash - Don't Think so? Date: 12/17/1998 1:42 PM
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Any comments on the following situation are very welcome!

Exercised an ISO on 1/2/98 for stock XYZ with an exercise price of $4.00 and a market price of $34. This creates an AMT item for the $30 difference - taxable at 26% (lets not worry about the AMT exemption for now).

Coming up on the end of the year now & the market price is at $24. If I sell now, I have a gain of $20 - at my marginal regular tax rate of 28%. This looks like a better tax situation than holding through the end of the year and incurring and paying the AMT tax.

I want to hold long term. If I sell and then immediately buy back -- well it 'feels' like a wash sale - is it?

What have I missed? Thanks in advance!

- MTBnd
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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7330 of 121061
Subject: Re: Feels Like a Wash - Don't Think so? Date: 12/17/1998 8:28 PM
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[[Exercised an ISO on 1/2/98 for stock XYZ with an exercise price of $4.00 and a market price of
$34. This creates an AMT item for the $30 difference - taxable at 26% (lets not worry about the
AMT exemption for now).

Coming up on the end of the year now & the market price is at $24. If I sell now, I have a gain of
$20 - at my marginal regular tax rate of 28%. This looks like a better tax situation than holding
through the end of the year and incurring and paying the AMT tax.]]

Maybe yes...maybe no. But remember that the AMT tax that you pay NOW will be used as a credit in this circumstance, and will be used to reduce your regular tax in the future...when you actually sell the shares.
Remember that you have TWO different basis in the shares of stock. One for AMT purposes and one for regular tax purposes. Please don't lose sight of that fact. It could be critical in your decision making process.

[[ I want to hold long term. If I sell and then immediately buy back -- well it 'feels' like a wash sale -
is it?]]

No way. At least what I can see. In any case, you would be selling for a GAIN. And the wash sale rules only impact LOSS sales. If you sell for a gain, you owe tax on the gain, and Uncle Sammy doesn't care what you do with the money...as long as he gets his.

[[ What have I missed? Thanks in advance!]]

The "gain" part, I'm guessing. But you also may be missing an opportunity of holding the shares for long term, paying the AMT tax on the "timing" of the ISO, and then taking the AMT credit on the actual long term sale of the shares. You might want to get some professional tax help on this before you make your final decision. At a minimum, review IRS Form 6251 and the associated instructions at the IRS web site.

TMF Taxes
Roy

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Author: MTBnd Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7338 of 121061
Subject: Re: Feels Like a Wash - Don't Think so? Date: 12/17/1998 10:22 PM
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What a great comment - THANKS!! (Boy do I feel dumb!)

(...But remember that the AMT tax that you pay NOW will be used as a
credit in this circumstance, and will be used to reduce your regular tax in the future...when you
actually sell the shares.)

WOW. This was big. I went back & looked at a range of scenarios. I'm working with 3000 sh XYZ. Looking short-sighted I minimize taxes this year by selling (& immed. buying back) 2200 sh. However, if I look at a less optimal '98 tax (say, selling 1500 sh), I generate tax credits for future years. I can look at this as an 'investment' with Uncle Sammy... The one looking most interesting is to pay $925 more this year and generate $5700 in credits for future years. Can you say 600% return?!


(Remember that you have TWO different basis in the shares of stock. One for AMT purposes and
one for regular tax purposes. Please don't lose sight of that fact. It could be critical in your decision
making process.)

OK - I think I understand this point too. Believe the argument to holding is to go for the 20% long-term rate, will have an AMT basis at $34 and significant credit available. Not sure how to think about this as I need to rise $10 from the current $24 before the long-term rates even become relevant. As I noted above - the credit is sweet.

Oh, and don't feel too sorry for me with the $10 drop -- I sold calls all year & covered the difference -- Not so Foolish - but I got lucky this time...

MTBnd


[[ What have I missed? Thanks in advance!]]

( The "gain" part, I'm guessing. But you also may be missing an opportunity of holding the shares for
long term, paying the AMT tax on the "timing" of the ISO, and then taking the AMT credit on the
actual long term sale of the shares.

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7359 of 121061
Subject: Re: Feels Like a Wash - Don't Think so? Date: 12/19/1998 1:12 PM
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[[ What a great comment - THANKS!! (Boy do I feel dumb!)]]

No need. The ISO issues and the AMT issues are pretty complex. If you would like to read some of the best thoughts on ISOs and AMT, check out the "Executive Compensation" section in the Fairmark tax site. There is a bunch of good information there regarding stock options...both ISOs and NQs. You can get there by pointing your browser to: http://www.fairmark.com

[[ (...But remember that the AMT tax that you pay NOW will be used as a
credit in this circumstance, and will be used to reduce your regular tax in the
future...when you
actually sell the shares.)

WOW. This was big. I went back & looked at a range of scenarios. I'm
working with 3000 sh XYZ. Looking short-sighted I minimize taxes this year by
selling (& immed. buying back) 2200 sh. However, if I look at a less optimal '98
tax (say, selling 1500 sh), I generate tax credits for future years. I can look at
this as an 'investment' with Uncle Sammy... The one looking most interesting is to
pay $925 more this year and generate $5700 in credits for future years. Can you
say 600% return?!]]

That is very, very possible, depending upon your regular tax and AMT issues. When you have ISOs, you MUST take tax planning to a whole new level...you have to run your "regular" tax planning, and then your AMT planning. Anything less will only give you a false reading on your total tax picture.

[[ (Remember that you have TWO different basis in the shares of stock. One for
AMT purposes and
one for regular tax purposes. Please don't lose sight of that fact. It could be
critical in your decision
making process.)

OK - I think I understand this point too. Believe the argument to holding is to go
for the 20% long-term rate, will have an AMT basis at $34 and significant credit
available. Not sure how to think about this as I need to rise $10 from the current
$24 before the long-term rates even become relevant. As I noted above - the
credit is sweet.]]

I don't remember the exact numbers from the original post, but this sounds about right. If you would like to restate your position again, and would like some examples of how the AMT, regular tax, and credits would work, let me know. I'll be glad to try to give you something that you can use.

[[ Oh, and don't feel too sorry for me with the $10 drop -- I sold calls all year &
covered the difference -- Not so Foolish - but I got lucky this time...]]

Good deal. Glad to hear it!!

TMF Taxes
Roy

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