I am a 35 year old single guy. Last year (6/15/2006), I sold 60% of my stock in a S Corp that I work for. I was granted the options in 2000, but I didn't excercise the options until 12/1/2005. I am now looking down the barrel of a 600,000 tax bill because of the short- term capital gain. Before I click 'submit', is there anything I can do to minimize the tax payment or spread it out over time?
...
So you had a STCG of $1.7 million more or less?
No, there isn't much you can do, except make sure you used the right number for your basis in the stock as mentioned by LoTax.
A huge gain is better than a huge loss. Keep up the excellent choice of employers and you can retire before ... uh, well, you can almost retire now.
You got that kind of money and you're doing your own taxes?
-HW "Skip" Weldon Columbia, SC
options until 12/1/2005. I am now looking down the barrel
Yeah, I had a 1.7 mil short-term capital gain. When I excercised the options at the end of 2005, I didn't pay any tax -- I might have screwed this up, however. The company is a small S-Corp so valuation of the shares is tricky. I assumed that the value was the option value because there was no other outside valuation. Was this a mistake?
That is an interesting point. If you paid $10 to exercise an option to buy a stock worth $50, did you make $40? Or is the profit put off until you sell it? I don't know; but I darn well would find out. (though I suspect you did it properly). With money like that involved you don't want to be doing it wrong, nor do you want to rely on information you pick off the internet. It is a great tool and I have gotten helpful advice many many times; but the IRS won't be impressed by it if it happens to be wrong. Consult a good local accountant. I have also gotten wrong information from usergroups; ocassionally from everyone answering my question. Perhaps I phrased it poorly or left out important information. Fortunately I did not rely on it.
Depends - were they qualified or non-qualified options?
Excellent advice.
Stu
If it's a market option that you bought for $5, you have a $15 basis in the stock, and $35 of unrealized capital gain (not taxed until realized). If it's an employment-related option, it works differently. Seth
Are these options NQSO's or ISO's? Or something else?
That affects the tax treatement.
-Jim
There is an article in Business Week today about that. You pay regular income tax on your profit between what you paid for the option and the exercise price, owed in the year you do it. You then pay capital gains tax on the profit between the exercise price and what you sell it for. So yes, it appears you screwed it up. Yes, valuation is tricky. If you claim the basis is the option value, you would be hard pressed to explain why you exercised them; should have done that when you could have waited to see where the stock went.
I may have screwed up but I'm not sure I agree that it was difficult to explain why I excercised them. I ultimately sold the shares I purchased as part of a buyout from a private equity firm that bought the majority of the company and thus the majority of my shares. Everyone with shares understood that this was the planned exit and thus everyone was looking to excercise their options at least a year before any transaction went down. Unfortunately, we had no idea when it actually would and I guessed wrong and purchased only 8 months before the transaction.
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.