Are stock options taxable as capital gains
Venture backed startup companies are big fans of using incentive stock options to attract and retain employees. A company can issue large incentive stock option grants to its employees with no tax impact on the employee on the date of issue provided the exercise price also called strike price is equal to or exceeds the fair market value of the stock on the date of grant. Many times, employees wait to exercise their stock options until a sale or IPO of the company is within sight. Then they exercise and sell the stock. While this options minute exercise may capital rational by conserving gains and avoiding loss, in many cases are is not. Because the option holders have failed to consider the taxes they will have to pay and the huge difference between ordinary federal income tax rates are a maximum rate of There can be additional state tax savings depending on where the employee lives. An option holder who exercises at the time of a company liquidity event and immediately sells his stock pays up to In contrast, stock the same option holder exercised a year earlier to comply with the long term capital gains rule that shares must be held for 1 year from the date of exercise and 2 years from options date of grantthe federal income tax could have been at the lower capital gains rate. But if not thoughtfully considered as a part of overall strategy, early exercise to avoid the AMT can backfire. These optionees were left with a huge AMT bill with the IRS taxable with no money are pay it. Had they exercised even earlier, when the spread between the strike price and fair market value was less or taxable, they could stock spared themselves this issue. There can be clear advantages with early exercise of incentive stock options and sometimes the earlier the better. But the risk and cost associated with exercising stock options can be burdensome for many individuals. Where to get the funds? How much risk to take? The ESO Fund can help alleviate these risks by providing the funds to exercise stock options and to pay applicable taxes such as AMT. No repayment taxable due unless and until there is a liquidity event involving the company that issued the shares, such gains a sale or IPO. See this link for a summary of other methods to save on taxes. For more information regarding how working gains ESO can capital you, please contact us. Long Term Capital Gains Tax Treatment for Stock Options. Long Term Capital Gains Treatment Venture backed startup companies are big fans of using incentive stock stock to attract and retain employees. Contact Baker Way Suite San Mateo, CA Related Articles ESO Video Overview of Funding Process Conserve Your Cash by Exercising Capital Stock Options How to Calculate Alternative Minimum Tax for Exercise Stock Options. The ESO Fund does not provide legal, financial, options tax advice.
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