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My wife gets stock options from Intel. I was just told by another Intel employ that we should cash in the options as soon as they can be exercised because the gain on the options is taxed as income. He said if you want to keep your money in Intel cash in the options and take to stock so the money it makes is taxed as capital gains (20%) vs income which is higher. Is this the way it works?
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My wife gets stock options from Intel. I was just told by another Intel employ that we should cash in the options as soon as they can be exercised because the gain on the options is taxed as income. He said if you want to keep your money in Intel cash in the options and take to stock so the money it makes is taxed as capital gains (20%) vs income which is higher. Is this the way it works?

First of all, slow down, take a deep breath, have a seat. You have time to make a rational decision. Don't do anything rash.

You are using a lot of terms here in ways that suggest you don't really understand stock options. It's possible that that other Intel employee doesn't as well.

If you were to "cash in the options as soon as they can be exercised," as mentioned in the first sentence, that is not the way to "keep your money in Intel" as mentioned in the second, just as one example of the kind of internal confusion that seems to be reigning.

There's a good website on the Internet to educate yourself on stock options and tax related matters -- http://www.fairmark.com -- and I'd recommend you go there as part of educating yourself.

"Cashing in options" generally means converting them into cash, which is a transaction immediately taxable as ordinary income, not as capital gains. The same transaction can be called a "buy-sell," denoting the fact that you both buy the stock and sell it within one day or a short enough period of time as to make it a short-term gain.

It is also possible to "buy-hold" and that has different tax consequences, depending on what kind of options your wife has been granted. The buy-hold would be the way to keep your money invested in the Company. Generally that's what companies like Intel want their employees to do.

Now, as to type of option: some companies grant employees "Incentive Stock Options" or ISOs; others use "Non-Qualified Options," NQOs.

Doing a buy-hold with the latter (with an NQ) does bring immediate tax consequences, as normal income, on the difference between the option price and the market price on the day of exercise. From what you describe it sounds as though Intel's options may be NQs. Under those circumstances it may well make sense to do a buy-hold early, assuming that the stock price will continue to increase over the 10 year or so life span of the option; waiting till near the end just makes that tax bite greater. By the same token, however, and don't overlook this: waiting until near the end means (if the price has continued to climb on the market) that the value of the option is greater. I.e., the tax is greater because the value is greater; not something to sneeze at.

Doing a buy-hold with ISOs is often more attractive [you should at the least find out what kind of option it is that your wife holds] because a buy-hold is not subject to income tax on that difference between the market price and the option price, not unless you sell it within the first year. [Selling it in the first year is called a "disqualifying disposition," which renders the ISO the equivalent of the non-qualified option.]

ISO buy-holds do expose you to the possibility of Alternative Minimum Tax, which can be a bear, but that usually only affects people with fairly high numbers of shares and a sizeable increase in value (into tens of thousands of dollars).

The whole subject is fully explained at http://www.fairmark.com , as I said, and I would encourage you ever so strongly to go there before you do anything.

mathetes

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mathetes

Compliments on a very well thought out answer on a complicated question--complete with a link. :)

I learned a lot about options just reading your post.

Gary
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Compliments on a very well thought out answer on a complicated question--complete with a link. :)

I learned a lot about options just reading your post.


Thanks, Gary.

Believe me, I've learned most of it the hard way, through acting too casually in connection with my own stock options over the years.

I look back now (now that the price has quadrupled in the last two years) and think what might have been if I'd realized what I was giving away. A bird in hand is not always worth the two in the bush. ..... sigh!

mathetes
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My wife gets stock options from Intel. I was just told by another Intel employ that we should cash in the options as soon as they can be exercised because the gain on the options is taxed as income. He said if you want to keep your money in Intel cash in the options and take to stock so the money it makes is taxed as capital gains (20%) vs income which is higher. Is this the way it works?

If I may be allowed a postscript to my first answer to your question ..... I've been thinking about the advice you were given by that other Intel employee: it strikes me that the strategy of cashing in options as soon as they can be exercised, so as to minimize taxes, is comparable to recommending that you ask your boss for "a smaller raise, please, so that I don't have to pay those annoying taxes."

You'd laugh at such advice, right?

Stock option "education pieces" I've seen sometimes refer to options as the equivalent of an interest free loan from the company. If you let it just sit there, it'll keep growing for you. The longer you let it sit, especially with a growth company like Intel, the more it will be worth. If you're planning on just cashing it, therefore, it makes at least as much sense to wait and let it grow to the max.

If, on the other hand, you are hoping to own a piece of Intel, through buying and holding, it may well make sense to exercise the option early in its life, before the market price gets so high that there are either income taxes or Alternative Minimum Taxes on that bargain price.......

Whatever you do, though, make sure you understand the range of choices you have and the consequences of each of them. Stock Options are great builders of wealth, especially when you're with a company like Intel.

some more to think about.

mathetes
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