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Fidelity has the option grant in an option account.

OK. Most companies use a broker for that.

I tell them to exercise the option at current market.

To exercise the option means to buy the stock. If that is all you tell the broker, then you will end up with stock in your account instead of options - plus the broker will ask you how you intend to pay the exercise price.

I suspect what you are really telling the broker to do is to exercise the options and immediately sell the stock. The broker would then use the sale proceeds from the stock to pay the exercise price.

I indicate what fed and state taxes to take out.

That confirms to me that you're exercising and immediately selling. If you exercise and hold, there is no need to withhold taxes.

I get the difference between the grant price less the taxes.

That also tells me you are doing an exercise and sale.

That is what has been happening. I never buy the stock.

Technically, you ARE buying the stock. It's just that you're also immediately selling it. You exercise the option and buy the stock, then sell the stock right away.

That leads to two transactions. The exercise of the option is not actually a taxable event. The taxable event is selling the stock. Because this stock was acquired through an employee stock option, tax law deems the income to be ordinary wage income rather than a capital gain.

The only exception would be for a sale of stock acquired in a qualified Incentive Stock Option when the stock is held for at least a year before sale AND the sale date is at least 2 years after the option grant date.

Also, these are long term options of over a year.

That is irrelevant. Stock options are almost always short term transactions. Besides, you have an employee stock option which can't be sold. The only thing you can do with an employee stock option is exercise it or let it expire.

Bottom line: Your employee stock option exercise and same day sale will be ordinary wage income, not a long term capital gain.

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