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Dear Board members,
Here's a long question.

I have some stock options at the company I work.
I had a question on exercising my stock options.

Lets say I exercise my options and sell them before
1 year, will my gain be short-term capital gain or
will it be ordinary income (same as exercise and sell on same day - cashless transaction).

Why I ask this is because I made a lot of losses on
internet related stocks and want to offset my loss
with gain from stock options. But as I understand it now, I cannot offset my loss if I do a same day sale.

Thanks for all replies.

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"Lets say I exercise my options and sell them before
1 year, will my gain be short-term capital gain or
will it be ordinary income (same as exercise and sell on same day - cashless transaction)."

That is ordinary income on the W-2. You will still report the stock sale on the Schedule D. However, your basis will be what you paid for it plus the amount included on your w-2. In this example, your basis per share will equal if the FMV of the stock on the date of exercise.

So it won't create any gain for you to offset other capital losses.

It is possible for your idea to work, if you sold the ISO stock for more than FMV of the stock on the date of exercise because that would generate both ordinary income and a short term capital gain. However, you would have to hold the stock for longer than one day.
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mytaxqa: Why I ask this is because I made a lot of losses on internet related stocks and want to offset my loss with gain from stock options.

I want to just suggest that you examine your premise here. People do routinely try to offset gains by opportunistically selling stocks where they register a loss -- gotta get rid of them sometime, so why not do it to advantage -- but the reverse scenario may be logically equivalent but strikes me as perhaps akin to shooting oneself in the foot.

Unless you are simply satisfied that the positive, winning investment (or option) has done as well as it can so you might as well sell it off, why would you not want to continue holding it for longer term gain? Losses continue to be carried forward. In the meantime, they will reduce your taxable income each year until you totally offset them.

In short, it may make sense to cut your losses; but you seem to be saying, let me cut my gains to take advantage of these losses.

Or am I missing something here?

mathetes
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