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In 1996, I was granted Nonqualified Stock Options that were exercisable on a schedule of 300 shares per year for five years. These options were granted at a cost of $25/share. The company I work for is now being bought by another company for cash at $40/share. Option holders will receive cash when the merger completes. This means I will receive $15/share for the options granted. For those options exercisable by the date of the merger, I will receive the cash immediately. For those shares not yet exercisable, I will receive the cash over the next two years.

Based on what I have read, the cash I receive will be taxed as income, not capital gains (so everything gets taxed at my tax rate). In effect, the date of exercise is the date of sale and the $15/share is all taxable income. Is this correct?
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<< Based on what I have read, the cash I receive will be taxed as income, not capital gains (so everything gets taxed at my tax rate). In effect, the date of exercise is the date of sale and the $15/share is all taxable income. Is this correct? >>

Yes. You will also have to report the sale, but the $15 is added to your $25 basis, so the sale results in a slight gain or loss.

TMF ExRO
Phil Marti
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