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I am guessing that the "cashless" or selling just enough would be considered a STCG transaction. Yes/no?

No, but let me elaborate.

And if we held onto some shares and sold them a few years down the road, for whatever reason, that sale would be treated as LTCG, assuming the price of the stock continued to rise up from the new FMV when the option was exercised. Yes/no?

Yes, but let me elaborate.

Refresher of how options work:
I'm going to use made up numbers and ignore fees.

You have options to buy 100 shares of stock at $5 per share.
At the time you exercise the options the stock price is $10 per share.

Exercising the options you now have $1000 worth of stuff that you only paid $500 for. This means that you have income of $500. That income would be taxed just like paycheck income.

And it means that your cost basis in the stock is $10 per share.

If you sell stock as soon as you exercise the options the sale price is still $10. Since your cost basis is $10 you have no gain. No gain = no taxes due on the stock sale.

An example of a cashless exercise:
Let's say that your income tax on the $500 would be $100. And that you have no money up front to pay for the stock.

So you need to get $600 in cash from the stock option. You would exercise all of your shares, and immediately sell 60 of them. You would pay $500 for the exercise of the stock, and $100 would go to taxes. This would leave you with 40 shares of stock with a cost basis of $10.

You could sell those 40 shares right away and pocket $400. Or you could keep the stock and it would be exactly like you had purchased it for $10 per share. If you sell it within a year when it was worth more than $10 per share short term tax rates would apply. If you sell it within a year when it was worth less than $10 per share it would be a short term loss. If you sell it after a year and a day when it was worth more than $10 per share than long term tax rates would apply. If you sell it after a year and a day when it was worth less than $10 per share it would be a long term loss.

If you sell it at a gain -- for more than $10 per share -- you're only taxed on the gain. So if you sell it at $11 per share, you're taxed on the capital gain of $1 per share. Rates vary based on short or long term gains.

- Megan

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