Exercising a stock option

Am trying to get some tax advice for my son (who asked for it) re: his
exercise of a stock option.
Several years ago as an incentive to join his present company, he was
given the option to puchase several hundred shares of common stock at
what was then about $29/share. He now wishes to exercise the option
and immediately sell the stock. Stock is now about $60/share.
Since he never paid for the stock in the first place, does he pay tax
on the entire $60, or on the $31 difference.
I know the capital gains rates changed this year. At what rate will
this gain be taxed?
Anything else of significance?
TIA
Reply to
Roy Starrin
He pays tax on the $31 difference.
Since he's not holding the stock for a year to be taxed as a long term gain, it's ordinary income.
Reply to
John L
Thanks for your help. So you are saying that he should have bought the stock, then waited a year before selling it, for it to have been a capital gain event?
Reply to
Roy Starrin
Perhaps. Nonqualified incentive stock options are taxed as ordinary income (the difference between the exercise price and the current value) when they are exercised. So assuming his options are nonqualifed, your son would have the same amount of taxable income whether he sells the stocks or not.
If he exercises the option but does not sell them, and pays the tax, any additional increase in value would be capital gain if he holds them for the required period.
So the only way he could have done better would have been to have exercised the options when the stock had a lower value.
If the options were qualified, there is no tax on exercise. To get long term capital gain treatment he would still have to hold the actual stock, rather than the options, for a year.
Stu
Reply to
Stuart Bronstein
To be long-term capital gain, yes. It's still a capital gain, just short term if not held for the requisite time (which is >1 year, not just one year, incidentally--one day over is enough, but has to be over). The transaction(s) will still be reported on Sch D, but in the short term section, not the long term.
Reply to
dpb
And since this was a same day exercise and sale, he should end up with a small short term capital loss, representing the broker's fee or commission.
Reply to
Arthur Kamlet
I thought nonqualified stock options (assuming that's what they are) are taxed as ordinary income when exercised, not even short term capital gain.
Stu
Reply to
Stuart Bronstein
In article ,
Correct. He gets ordinary income of the difference between the option price and FMV when he exercises the option, but then he ALSO gets a short-term loss due to the fees from the immediate sale.
Reply to
Barry Margolin
In article ,
You are both right.
When doing a same day exercise and sale with a NQSO, the Bargain Element, which is the difference between FMV of the stock at time of exercise and the exercise price, is added to taxable wages (and FICA wages) on the W-2 form.
And W-2 Box 12 Code V tells you the amount of the bargain element, but it's already added into the W-2 wages.
So as we can see, the bargain element (the "profit") is going to be treated as earnd income and taxed as ordinary income.
Since it was a same day exercise and sale, a 1099-B will list the sales price, usually the gross sales price.
That sale gets reported on Schedule D Short Term.
The cost basis is the exercise priceplus the taxable bargain element (which is equal to the FMV at exercise) plus the broker's fee. So the ST capital loss on the Sch D is just the broker's fee.
Reply to
Arthur Kamlet
On Wed, 9 Jan 2008 18:18:24 EST, snipped-for-privacy@panix.com (Arthur Kamlet) wrote:
Many thanks to all for the advice. Have sent it on to my son. In fact, I was so impressed, I am about to ask a "Second Question"
Reply to
Roy Starrin
In addition to all the other responses, there is also social security, medicare, state tax on the $31. I'm not sure if qualified employee stock options have social security and medicare, but I'm pretty sure non-qualified employee stock options do. The employer has to also pay their share of social security and medicare.
Is there any AMT impact from exercising your options into stock and holding?
Reply to
removeps-groups
In article ,
If ISOs there is no FICA tax on the ordinary income rsulting from a disqualifying disposition. An ISO with a same day exercise & sale of course is disqualifying.
AMT could be affected simply because AGI is raised.
If this is an ISO, and not disqualified in the year of exercise, then the bargain element (profit upon exercise) is additional income for tentative minimum tax calculation, and the bargain element is not added to the cost basis for AMT.
Reply to
Arthur Kamlet
So the difference between market and strike price at the time of exercise times the number of shares minus commissions gets reported one the AMT form 6251 line 13 ("Exercise of incentive stock options (excess of AMT income over regular t ax income)"). But on form 8801, you get a credit for the AMT tax on stock options because you don't have to report your stock option phantom profit on this form. Is my reasoning correct? And is the AMT credit a refundable credit?
Reply to
removeps-groups
In article ,
There is now a refundable credit; that's new.
And remember that when you finally sell the stock, the basis for regular income tax is just the exercise price, while the basis for AMT is the exercise price plus the Bargain Element (what was added to the 6251 in the year of exercise). This produces a smaller gain for AMT than for regular income tax and helps lower AMT and/or produce an AMT credit.
You didn't ask, but only AMT timing issue items may be used to calculate AMT credit. And for most taxpayers -- almost all -- the three timing issues of concern are ISO exercise bargain elements, depreciation, and passive activity differences.
Non-timing issues such as loss of Schedule A deductions or dependency exemptions are permanent and not subject to AMT credit.
Anyway, if you haven't tried this a few times, remember you may be attaching to your tax return both a regular tax and also an AMT version of several forms and schedules, including Schedule D already mntioned, and the passive Activities and depreciation forms.
Reply to
Arthur Kamlet

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