Originally Posted by ERD50
...someone who cashes in options that they earned over many years is simply not as 'rich' as the person who makes that same amount year in and year out - yet they are taxed the same...
I'm quite sure there are legitimate cases where the progressive tax code is a penalty of sorts on windfalls. The OP might be such a case. But, as it pertains to stock options specifically, it's been my observation that the more frequent cases of tax shock are simply the result of inadequate planning.
I guess I was fortunate. Even after ER, no one ever forced me to exercise options to the detriment of my tax situation. I did have years that spiked into very high brackets due to option exercises. But that was my decision after weighing the price risk, timing, and other considerations.
My overall objective was to limit concentration in Megacorp stock and get the money into the balanced portfolio as quickly as possible without creating a tax disaster or sacrificing potential future growth. Usually, I exercised the oldest, in-the-money options every year, in approximately the same amount of shares as I was granted each year. So the income stream was spread out to minimize taxes and closely tied to what I "earned" on an annual basis.
Had I clung to them for years hoping for big gains, then exercised all at once and paid tax through the nose... well, I don't consider that a shortcoming in the tax code. It's just a less tax-efficient exit strategy.