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<<A couple of years ago, I was given some options, non-qualified I believe it is called. The
stock at the time was $19 and is currently around $30. >>

I'm just a little confused with the questions that you have posed. And while the responses you received appear to be "right on", I think I'll take a bit of time and provide some additional explanation. What you FIRST might want to do is to go to the Taxes Frequently Asked Questions area (you can get there by starting at the Main Screen (home page), and then clicking on the Fools School area...just follow the road maps from there) and reading my post on stock options and their associated taxation issues. I'm afraid that my answers are going to be a little different that those you were provided, probably because I'm not clear on YOUR process and what you received. So some additional clarification may be required.

<< When I buy the stock, I will have to pay taxes on the difference between the $19 and the $30. >>

This is the first area that I'm not clear on. Generally, when you were GRANTED the options (or, as you say, when they were "given" to you), if the Fair Market Value of the shares could be determined (like in a public company), your W-2 wages (or 1099 wages) would have been "grossed up" for the "bargain element" of the options. The bargain element is the difference between the option price and the FMV of the shares at the date of the option grant. So you would have paid taxes on the "bargain element" of the option way back when. If the FMV of the shares could NOT be established when the option was granted (such as a privately held company where shares are not actively traded), your income would NOT be grossed up by the bargain element until the options were exercised.

<< a. Are the taxes I pay income or capital gains? Is there any way to pay 20% instead of 28%>>

Again, your income will be impacted by the bargain element when the options were granted (assuming the stock was traded, and the FMV of the options could be determined). If the FMV of the options could not be determined back then, then your normal W-2 income (or 1099 income) will be increased for the bargain element now.

But regardless of when the "bargain element" of the option is included in your income, it will be regular income, and you'll pay tax on this income at your normal, marginal tax rate...could be as high as 39.6% depending upon your personal tax situation. And there is no way to convert a "bargain element" income issue to anything other than straight compensation.

<< b. After the stock is bought and the taxes are paid will the $30 price be my new base price?>>

Right. Your basis in the shares will be what you paid for the shares ($19) plus the amount included in income at the time the option was granted or exercised (the bargain element...$11 in your case, I'm assuming).

<< c. Will I then have to wait 18 months and a day to sell the stock and pay 20% capital gains?>>

Yup. Your holding period date will begin on the date that you exercise the options. So in order to get the new 20% capital gains rate, you would have to hold the options for at least 18 months. But remember that if the shares are at $30 right now, and your tax basis is at $30, you would have virtually no gain or loss on the transaction.

Hope this helps a bit...
TMF Taxes
Roy
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