Tax on Stock options?

Question

i have 3000 stock options at $1.50 and the current price is $7.00 if i do cashless excercise, thne I assume i get hit with regular income tax on the gains, if I exercise them and hold them for a year I get taxed as long term capital gains. I had these options for 4 years now, does that count as holding them

Answer 1

The answer to your question depends on the type of stock option you hold. Since most are NQ options let me address the results of exercising those type options. The date the option was granted has little if any effect on the tax liability. You seem to plan on using a "cashless" means to exercise the option, which is the most common method. In that event you purchase the stock and sell it as soon as the broker can. That is normally within minutes and rarely more than hours. I have seen a couple that took a few days because the stock was little known and rather undesirable. In the cashless method you will see the difference between the option price and the exercise price appear on your W-2 as included in your wages and noted in box 12a with a "V" code. You will also receive a 1099 from the stock brokerage reporting the sale to the IRS. It is critical that you report this sale on your return although it will be a "zero" loss/gain transaction. If you fail to report the sale the IRS will request you pay tax on the gross amount of the sale.

Answer 2

The clock for "long term gains" starts once you actually purchase (exercise) the options.

The "Initiate an Exercise-and-Sell Transaction" (cashless) option will always trigger short term capital gains since you immediately sell the options for cash. The proceeds you receive from an exercise-and-sell transaction are equal to the fair market value of the stock minus the grant price and required tax withholding and brokerage commission and any fees.

Many people in the 90's were greedy and held onto their stocks to avoid capital gains. When stock prices fell, many ended up with a loss yet still had to pay the capital gains tax based on the purchase price. Don't get too greedy.

Answer 3

If you buy the options and hold them for a year then you can sell them and the gain is long. Just holding the options does nothing to start the clock ticking, first you have to buy them and turn them into stock in your portfolio.