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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121223  
Subject: Re: Advice on stock options Date: 3/20/2008 11:51 AM
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Mrs. Goofy has options on a significant number of stock options which must be exercised by April 1. We are not comfortable purchasing all of them, but have found a buyer for 2/3 of them at a price acceptable to a (well) qualified buyer, and to us. We would retain the 1/3 of the options (stock, once exercised) for ourselves, which would likely not be liquid for several years (private company.)
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I am assuming the company is Mrs. Goofy's employer.
You don't say whether these are "ISOs" (incentive stock options, a/k/a "qualified options" in the tax code,) or NSOs (nonqualified stock options).

If these are NSOs, the real hit comes at the exercise date, and the income is taxed as compensation for ALL purposes - income and FICA, included. Then your basis in the stock becomes the current value, and your later gain on the resale is measured from that point.

For ISOs, it's a hit for AMT only, but it will make most people pay AMT, if they don't already. Note - with ISOs, you have a higher basis for AMT purposes than for regular tax, reflecting the gain recognized at the exercise.

So you might have a long or short term gain, but it might not be very much, if it's close to the value at the exercise price. Now, it's a private company, so I don't know how you'd value it, other than the price you have negotiated with the 3rd-party buyer. Does the company have a formula in use, with the option plan, or with a retirement plan, perhaps?

Bill
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