Options newbie...

[Delawaredave5]

Wife has a small amount of Megacorp options expiring.

Says there's 4 ways to execute:
1. Cashless Sell: options are executed and net proceeds are cash to you
2. Cashless Hold: options are executed and net proceeds are shares of Megacorp to you
3. Cash Purchase: you supply cash and you end up with shares bought at lower price
4. Stock Swap: I guess you supply other shares of stock which are sold/exchanged to execute options (I didn't follow this).

For 1 and 2 above - any proceeds are short term gains - right ?

For 3 and 4, you end up with shares of Megacorp - which if you hold for a year and then sell results in long term gain - right ?

Thanks !

 

[Animorph]

It's been a while since I had to worry about that kind of stuff.

Find out if your options are qualified (ISO, incentive stock options I think) or non-qualified (NQ) options. Tax treatments are different for the two. ISO's have some long-term capital gain possibilities that may be beneficial, depending on what the buy price is and how the stock does during the next year. They can also be an AMT tax problem. NQ's you pretty much just cash in (#1), but result in all regular income.

 

[Delawaredave5]

It's been a while since I had to worry about that kind of stuff.

Find out if your options are qualified (ISO, incentive stock options I think) or non-qualified (NQ) options. Tax treatments are different for the two. ISO's have some long-term capital gain possibilities that may be beneficial, depending on what the buy price is and how the stock does during the next year. They can also be an AMT tax problem. NQ's you pretty much just cash in (#1), but result in all regular income.

Thanks. They are both ISO (1/3) and NQSO (2/3rds).

Looks like the gain on NQSO's is counted as income in year of exercise - regardless of converted to shares or cash, regardless of "cashless" or not.

Exercising Nonqualified Stock Options

Cashless Exercise of Nonqualified Stock Options

 

[ERD50]

It's been a long time, and I don't even recall if mine were Q or non-Q, but...

watch out for your W2. As I recall, some of this gets rolled right into your W2 as income whether you exercise or not (I think the discounted amount, i.e. $10 if you got $30 stock at $20). It may not get called out separately, so it is easy to double count. Don't take my word on any of this, I'm just pointing out possible pitfalls for you to investigate

-ERD50

 

[Animorph]

Yeah, I remember that W2 problem also now that you mention it. My biggest problem was that the income may or may not be reported on the W2. I always had to reverse engineer the W2 with check stubs and ISO info to figure out what had made it into the W2. I think I had cases where it was and wasn't, but mostly wasn't. DW's was consistently included.

For the ISO's, you'll have to do your research at irs.gov and check the internet tax help sites to figure out how to optimize your return and get the taxes correct.

 

[clifp]

Thanks. They are both ISO (1/3) and NQSO (2/3rds).

Looks like the gain on NQSO's is counted as income in year of exercise - regardless of converted to shares or cash, regardless of "cashless" or not.

Exercising Nonqualified Stock Options

Cashless Exercise of Nonqualified Stock Options

Generally speaking for NQ options you are better off doing a cashless exercise and taking the profit.

For ISO the situation is more complicated. If you are comfortable holding the companies stock for a year and there is a fair amount of profit involved, I think it is worth while to hold for a year to transform the short term capital gain into a long term and the lower tax rate. That said they are many situation where this would provide no or minimal benefit. For example if you have large capital loss carry forward from 2008. Also the 'paper gain' from exercising ISO is treated as income for AMT calculation is you currently are subject to AMT I'd say just exercise and sell.