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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 121095  
Subject: Re: capital gains when you short Date: 7/14/1999 7:53 AM
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Should I sell some options to get the gains categorized as income instead of triggering AMT? I've assumed that the AMT rate on the options would be less than the income tax rate (especially for this year).

You really need to do some what-if analysis with TaxCut or TurboTax or, especially if the dollars are significant, a tax specialist. In general, you are better off with AMT than with regular income tax. I think of AMT as prepaid long term capital gains taxes; it's typically in the same range (approx. 20-25%), which is probably lower than your Federal rate for normal income (an assumption predicated on the fact that you have significant options, which is typically true only of highly compensated people).

So it usually would not make sense to incur a disqualifying disposition by selling stocks acquired through exercising an ISO prior to the one year + one day holding period.

By the way, there's a website -- www.fairmark.com -- where there's a lot of useful information on ISOs, AMT, and related subjects. Written by a tax lawyer but still in comprehensible English.

When I exercised and held, I believed it would go up. Well, I was right, but it's gone up a lot faster than I expected, so I was considering whether I could use a short sale as a hedge. My thinking was that if it corrects, everything's hunky dory. If it keeps going up too far, I cover with the options, and it's just as if I originally sold them.

What's your time frame here? And what do you think the company is going to do over the long term? Even if it should fall (correct) in the short term. You sound just a little like the proverbial "I want to eat my cake and have it too" situation. I have heard of hedging, in the kind of situation you're in, with puts and calls; I have no direct experience with such strategies. I know my company specifically directs all current employees not to participate in such strategies; since you said you are now a "former" employee, such restrictions may not apply, but you might want to check, especially if you were in any kind of "insider" or close to insider position.

mathetes
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