Can anyone explain a little bit about a strategy to exercising a nonqualified stock option? I work for a Fortune 500 company, and thought it'd be a good time to exercise an option I've had for 8 years (expires in 2 more, and the stock is less than a point away from an all time high). But if I'm reading an online form correctly, I pay ordinary income taxes on the difference between the grant price and today's price (if I exercised today), regardless of whether I hold or sell the shares. Is this correct? Because it seems like it would have been a better deal to exercise at a low price (like 2 or 3 years ago) , and hold them until today to pay the capital gains tax rate on the difference from 2 or 3 years ago to today. Not to mention the fact that after I pay the taxes, the stock could go down, so there seems to be little advantage to "exercise & hold" when the stock is at an all time high. Correct? Please help a novice out.
Excercising Stock Options
- Thread starter D_Wreck11
- Start date
NameAlreadyInUse
500+ Posts
Based on my limited understanding, I agree with you. I always assumed the buy and hold were for thsoe who didn't want to cash them out but their option period was about to expire.
NickDanger
2,500+ Posts
As long as you don't do some squits while 8.5 months pregnant, I think you are OK.
politically correct horn
25+ Posts
Nick
No tax on grant. Tax on exercise equal to difference between the current FVM of stock received less the amount you pay (strike or exercise price). This "spread" is ordinary compensation income that is subject to payroll taxes and income tax withholding. Taxes may be withheld from your salary or other compensation income, or you may have to sell some of the stock to cover the withholding or make some other arrangement with your employer. However, if the option stock is nontransferable or subject to a substantial risk of forfeiture, then you aren't charged with compensation income until those restrictions no longer exist. In that case, you can choose to pay tax on exercise so that all gain from that point on would be capital gain.
When you sell stock acquired by exercise of an NSO, you have capital gain if you were subject to tax either at option grant or exercise, or when restrictions on your option stock lapsed. Otherwise, you have compensation income at the time of the sale.
In hindsight, it looks like you should have exercised when the price was lower, but that is the real value of an option in the first place. If the stock was underwater now, you could walk.
When you sell stock acquired by exercise of an NSO, you have capital gain if you were subject to tax either at option grant or exercise, or when restrictions on your option stock lapsed. Otherwise, you have compensation income at the time of the sale.
In hindsight, it looks like you should have exercised when the price was lower, but that is the real value of an option in the first place. If the stock was underwater now, you could walk.
There is no reason for you to exercise and hold these options, unless you feel the stock is going up from here. If that's the case, then just wait to exercise until you're ready to sell. NQO are always going to be taxed as regular income, whereas ISO are capable of receiving capital gains treatment with the proper holding period.
Just do a cashless exercise/sale of the shares and pay the taxes.
Just do a cashless exercise/sale of the shares and pay the taxes.
NickDanger
2,500+ Posts
I was taking notes as I intend to start exercising, myself.
For future reference, the rule of thumb with stocks is buy low, sell high.
You pay the income tax on the difference regardless if it is held as a short term or long term investment. Since your paying taxes on it, you might as well cash them in, then invest them in a Traditional IRA and you pay no income taxes up to $4,000.
That is the best way to avoid tax, but still have a growing investment...
You pay the income tax on the difference regardless if it is held as a short term or long term investment. Since your paying taxes on it, you might as well cash them in, then invest them in a Traditional IRA and you pay no income taxes up to $4,000.
That is the best way to avoid tax, but still have a growing investment...
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