Tax question related to stock options?
Answer:
The two biggest types of stock options are statutory (otherwise knows as ISO or "qualified") and non-statutory (otherwise known as "non-qualified"). There is no tax event when exercising ISO options. The tax event occurs when they are sold. AMT may occur when ISO are exercised and not sold by years end, but that is a different discussion.
For the more common non-qualified stock options, a tax event occurs during exercising. The gain from the grant price to the Fair Market Value when they are exercised is taxed as compensatory income and will show up on your W-2 box 1, 3, and 5 (the 3 and 5 mean it is subject to FICA). You will also see an amount in box 12 with a "V" showing how much gain was included in box 1 income. This gain is taxed REGARDLESS how the stock exercise was funded.
There are two ways to fund the exercise. Self-funding (if I'm not mistaken) is when you pay cash out of your pocket for the exercise. Cashless is when the cost of exercising the option is funded by immediately selling a portion of the exercised shares so that the proceeds from the sale are exactly enough to pay for the exercise.
If the option is an ISO, the cost of exercise is the number of shares times the grant price per share. If shares are sold to cover this cost (cashless), the sale of those shares triggers a tax event. The "gain" on the sold shares is ordinary income and is calculated by taking the sales price minus the grant price (let's assume the sales price is the same as Fair Market Value to make things simple) times the number of shares sold. This gain is considered ordinary income, but NOT subject to FICA. Why isn't the gain taxed as capital gain, because you didn't hold onto the stock (after exercise) for more than a year. The shares that are exercised and NOT sold do NOT incur a taxable event.
If the option is non-qualified, it doesn't matter which funding method you choose because all granted share are taxed upon exercise.
In summary, you incur more tax when funding an ISO with a cashless exercise than you do when you fund it yourself. You incur no tax when funding an ISO with yourself. You incur full tax for all non-qualified exercised regardless of how it is funded.
Based on my personal experience, exercising and holding ISO stocks can be beneficial because, if you hold the shares for at least one year after exercise and at least 2 years after they were granted, all gain is long-term capital gain. The downside is you may have to pay AMT and the stock could lose value after it is exercised. If you like to roll the dice, go ahead and try exercising and holding. Otherwise, exercise and sell right away. If you were granted non-qualified stock options, it is rare to benefit by exercising and holding. Please exercise and sell right away. See the attached link for someone else's opinion and, like always, DO YOUR OWN RESEARCH before believing me or anyone else on this post.
I need a lot more information to assess this question like is this an ISO, statutory, or non statutory option. Please refer to this IRS link http://www.irs.gov/publications/p525/ar0.
and select "Stock Options" under "Employee Compensation".
If you exercise the option and sell said stock then you have tax on the capital gain from the sale. If you exercise the option and buy the stock to hold then you will have no tax until that point in time you sell the stock.
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