Message Font: Serif | Sans-Serif
No. of Recommendations: 4
IIUC, the upshot is that the capital gain will not push up my income tax bracket and I only have to pay the cap gains? That will be advantageous and allow me to to use the proceeds for better investments.

No, you completely misunderstand. Let me take a shot.

Your employer has awarded you options to buy company stock for a price below the current market price. When you exercise the option the difference is wage income to you, subject to all the taxes your ordinary pay is.

It sounds to me that what you're talking about doing is what (I at least call) a same-day exercise/sale. You exercise the option, buy the stock, immediately sell the stock to come up with the money to buy the stock. When the dust settles, the agent:

1. Sends the purchase price of the stock (the option price) to your employer.

2. Calculates income tax withholding (probably 25% for Federal) and FICA/Medicare withholding and sends those amounts to your employer for credit to your account. Everything should be reflected in your YTD figures on your paystub. (It may take a few payroll cycles for this to happen.)

3. Sends you what's left of the sale proceeds (after also taking their fee) along with a detailed accounting of what happened. KEEP THIS!

4. Your W-2 will reflect the gross wage amount in Boxes 1,3,5; the withholding in Boxes 2,4,6. The wage element from the exercise will appear on your W-2 in a separate box with a code (I think "V"). The back of your W-2 has a wealth of information about what's in each box.

5. You will also get a 1099-B for the sale of the stock. The amount paid to buy the stock plus the wage income element is your purchase price. When the dust settles on this transaction you'll probably have a small short-term capital loss roughly equal to the fees. You must deal with this on Schedule D even though it's all be covered elsewhere. (This is the slip-up that Peter was talking about. Sometimes people think "Oh, I paid all the taxes back when I exercised, so I don't have to do anything else.")

Long-term capital gain treatment would come into play only if you held on to the stock, but it sounds like that's not what you have in mind. If you want to talk about that, let us know and we can tell you what choices you have.

Rule Your Retirement Home Fool
Print the post  


In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.