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Question for you corporate types who have options on your company stock:

What taxes must be paid when you exercise? And when?

Example. Suppose you have 1 option to buy stock at $5. Suppose the current price of the stock is $20. Let's say you exercise the option and buy 100 shares at $5 ($500 cost ignoring commissions and such). You now own 100 shares of stock valued at $2000.

Let's say you hold the stock. Do you owe taxes on the gain at this point? What is taxed? What happens if the stock price goes below the exercise price before the end of the current tax year?

Thanx for any help. I am noticing some options being exercised and held at some small companies. If they are on the hook for taxes based on the exercise transaction, I assume this is bullish as they are holding and expecting the stock to rise - or they would have sold immediated to ensure they had money to pay the taxes.

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