cashless stock exercise help!

Nevermind. Handled on misc.invest.financial-planning.

thanks anyway

Not really.

On a same day exercise and sale, there is a broker or financial institution who handles the nitty gritty details. First let's define Bargain Element (BE) here to mean the Fair Market Value of the stock at time of exercise, less the Exercise Price. In slow motion, here is approximately what happens:

He asks to exercise and sell 11,000 sh. The broker will then lend him the exercise price, and will withdraw the BE from an account set up by the empoloyer, and then buy the stock, and immediately sell it. When selling it, the Exercise price is repaid by the employee to the broker, and pays the difference to the employee. Since the BE has gone from the Employer's account to an account used for the benefit of the employee, the employer will add the BE to the W-2 form of the employee and also indicate the BE amount on the W-2 form box 12-V. So the employee has ordinary wage income of BE when he exercises. He sells same day, so the broker generates a form 1099B to report the sale of stock. A 1099B means the employee will have to file Schedule D reporting the sale of this stock for FMV less broker commission if net sales price is reported, or FMV if gross is reported. In either case, Cost is FMV modulo the broker commission. The net result on schedule D is a small short term loss about equal to the brokers commission. There is no particular tax advantage to hold NQSOs more than

30 microseconds, much less more than one year. There might be other reasons why the stock might want to be retained, but almost everyone who has NQSOs will do a same day exercise and sale. ISOs have an incentive (as you might have guessed by their name) for holding more than 2 years from date of grant and one year from exercise date. If so, the BE becomes part of the long term capital gain, instead of ordinary income. On the other hand the BE becomes income for AMT tax purposes. Bottom line: From strictly a tax point of view, holders of NSQOs would almost always want to do a same day exercise and sale.

-- Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH

kastnna wrote:

If these are nonqualified stock options, I don't think your Option 2 will work. Assuming the options had no readily determinable FMV at the date of grant, the employee has ordinary income (compensation) at the date of exercise to the extent of the "bargain element" -- the difference between the FMV of the stock at the date of exercise and the strike price. So the $225 gain will be ordinary income, included in his W-2. If he sells enough of the stock to cover the $200,000 cost, he'll sell about 5,176 shares, resulting in little or no gain or loss since his basis will be stepped up to the FMV at the date of exercise. He'll keep the remaining shares with a basis of approximately $38.60 per share (the FMV at date of exercise) and have capital gain or loss on their subsequent sale. The difference between an NSO and an ISO is that no income is recognized on an ISO at the date of exercise (although the bargain element is included in alternative minimum taxable income). If these were ISOs, he would have a disqualifying disposition with respect to the shares that were sold immediately upon exercise, resulting in ordinary income. He'd sell approximately 5,176 shares at about $38.60 per share, for which he paid approximately $18.18 per share, resulting in a gain of approximately $105,800 which would be ordinary income. He would still have the rest of the shares with a basis of $18.18 per share. If he held them for the statutory period, he would have capital gain to the extent of the excess of the sale price over $18.18 per share. Katie in San Diego

kastnna wrote:

If these are nonqualified stock options, I don't think your Option 2 will work. Assuming the options had no readily determinable FMV at the date of grant, the employee has ordinary income (compensation) at the date of exercise to the extent of the "bargain element" -- the difference between the FMV of the stock at the date of exercise and the strike price. So the $225 gain will be ordinary income, included in his W-2. If he sells enough of the stock to cover the $200,000 cost, he'll sell about 5,176 shares, resulting in little or no gain or loss since his basis will be stepped up to the FMV at the date of exercise. He'll keep the remaining shares with a basis of approximately $38.60 per share (the FMV at date of exercise) and have capital gain or loss on their subsequent sale. The difference between an NSO and an ISO is that no income is recognized on an ISO at the date of exercise (although the bargain element is included in alternative minimum taxable income). If these were ISOs, he would have a disqualifying disposition with respect to the shares that were sold immediately upon exercise, resulting in ordinary income. He'd sell approximately 5,176 shares at about $38.60 per share, for which he paid approximately $18.18 per share, resulting in a gain of approximately $105,800 which would be ordinary income. He would still have the rest of the shares with a basis of $18.18 per share. If he held them for the statutory period, he would have capital gain to the extent of the excess of the sale price over $18.18 per share. Katie in San Diego

kastnna wrote:

If these are nonqualified stock options, I don't think your Option 2 will work. Assuming the options had no readily determinable FMV at the date of grant, the employee has ordinary income (compensation) at the date of exercise to the extent of the "bargain element" -- the difference between the FMV of the stock at the date of exercise and the strike price. So the $225 gain will be ordinary income, included in his W-2. If he sells enough of the stock to cover the $200,000 cost, he'll sell about 5,176 shares, resulting in little or no gain or loss since his basis will be stepped up to the FMV at the date of exercise. He'll keep the remaining shares with a basis of approximately $38.60 per share (the FMV at date of exercise) and have capital gain or loss on their subsequent sale. The difference between an NSO and an ISO is that no income is recognized on an ISO at the date of exercise (although the bargain element is included in alternative minimum taxable income). If these were ISOs, he would have a disqualifying disposition with respect to the shares that were sold immediately upon exercise, resulting in ordinary income. He'd sell approximately 5,176 shares at about $38.60 per share, for which he paid approximately $18.18 per share, resulting in a gain of approximately $105,800 which would be ordinary income. He would still have the rest of the shares with a basis of $18.18 per share. If he held them for the statutory period, he would have capital gain to the extent of the excess of the sale price over $18.18 per share. Katie in San Diego