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I have gone through the FAQ and Fool School, and it helped some. But I still need some clarification.

I'm trying to figure out how to deal with some options that will be expiring in the not-too-distant future. My concern is a major tax hit. If I do a cashless exercise, I get a check. Since I never actually owned the shares, this is a short term gain(?). Or is it treated as ordinary income? If I understood the School it is ordinary income(?).

I had an idea to deal with it, but want to know if I'm missing something. Is it still ordinary income if I take ownership of the shares? If I sell some shares obtained in the employee purchase plan I only pay long-term cap gains (20%) since I've held them for years. Because of the price differential between my option price and the current stock price I shouldn't have to sell too much. I then use the proceeds to BUY my option shares, thereby owing no tax on them(?). In the process I end up with more shares in my account, and only have to pay some long term cap gain instead of short term or ordinary income taxes.

My ordinary income bracket is slightly higher than the long term rate (but lower than the short term!). So the long-term is preferable if I can do it.

Ok...please tell me where I'm wrong...

Thanks in advance.
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