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Author: mathetes Big red star, 1000 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121114  
Subject: Re: capital gains when you short Date: 7/13/1999 8:49 PM
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I exercised and held a good deal of my former company's ISO's, and the stock's gone up quite a bit. I haven't yet fulfilled the 1-year holding requirement, and my income for this year is abnormally high due to ISO's I exercised and sold cashlessly, so I'd like to avoid selling them if I could.

Bob already posed the question I wondered about: AMT. You say you held "a good deal... of the ISOs." If that good deal involved bargain element gains of $30,000 or more, then you pretty definitely are in AMT territory. Assuming you also have other preference items on your tax return (state and local tax deductions, real estate tax deductions, for example), you will be incurring AMT if those preference items and the bargain element here from your ISOs exceeds $30 to $35,000.

I don't know what the complications might be if you start combining with covering short sales. More importantly, the two actions together are quite incongruous. People normally buy ISOs on the premise that they're going up; they short stock on the premise that it's going down. Doing the two actions in concert sounds like shooting from the hip and getting yourself in the foot.

Covering would pretty certainly be a "disqualifying disposition" of the ISOs, if it's within 12 months, exposing you to normal income tax on the bargain element, instead of AMT.

You would be well advised to talk to somebody in whom you can place your trust, and talk about the amounts involved, do some what-if scenarios, and so on.

mathetes
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