|
Posted by kastnna on January 8, 2007, 9:39 pm
Please log in for more thread options
I need a quick stock option refresher course please!
I've got a client with about 11,000 stock options in
Southern Co (SO). The grant prices vary, but it will cost
him $200,000 to exercise the options (which he doesn't have
in cash). Once purchased, the shares can be redeemed for
about $425K. That's a $225K gain before taxes. This is a
Non-Qual grant, not an ISO.
This is my understanding. Please correct if necessary. If he
does a cashless "exercise and sell" transaction, he will buy
and immediately sell all 11,000 shares and the $225K profit
will be taxed as ordinary income. But he will have the
remaining cash in his pocket.
If he does a cashless "exercise and sell to cover", he will
buy all 11,000 shares and only sell enough to pay the $200K
it cost him to buy. The $225k gain will be left in stock
certs for 13 months and then liquidated. This will cause the
$225K gain to be taxed at Capital Gains rates. The downside
is that he is subject to the stock volatility for 13 months
AND he doesn't have the cash in hand.
We are leaning towards option 2, but I want to make sure I
have the taxes correct.
Thanks
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
|
Posted by kastnna on January 10, 2007, 9:38 pm
Please log in for more thread options
Nevermind. Handled on misc.invest.financial-planning.
thanks anyway
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
|
Posted by Arthur Kamlet on January 10, 2007, 9:38 pm
Please log in for more thread options
> I need a quick stock option refresher course please!
>
> I've got a client with about 11,000 stock options in
> Southern Co (SO). The grant prices vary, but it will cost
> him $200,000 to exercise the options (which he doesn't have
> in cash). Once purchased, the shares can be redeemed for
> about $425K. That's a $225K gain before taxes. This is a
> Non-Qual grant, not an ISO.
>
> This is my understanding. Please correct if necessary. If he
> does a cashless "exercise and sell" transaction, he will buy
> and immediately sell all 11,000 shares and the $225K profit
> will be taxed as ordinary income. But he will have the
> remaining cash in his pocket.
>
> If he does a cashless "exercise and sell to cover", he will
> buy all 11,000 shares and only sell enough to pay the $200K
> it cost him to buy. The $225k gain will be left in stock
> certs for 13 months and then liquidated. This will cause the
> $225K gain to be taxed at Capital Gains rates. The downside
> is that he is subject to the stock volatility for 13 months
> AND he doesn't have the cash in hand.
>
> We are leaning towards option 2, but I want to make sure I
> have the taxes correct.
Not really.
On a same day exercise and sale, there is a broker or
financial institution who handles the nitty gritty details.
First let's define Bargain Element (BE) here to mean the
Fair Market Value of the stock at time of exercise, less the
Exercise Price.
In slow motion, here is approximately what happens:
He asks to exercise and sell 11,000 sh. The broker will
then lend him the exercise price, and will withdraw the BE
from an account set up by the empoloyer, and then buy the
stock, and immediately sell it.
When selling it, the Exercise price is repaid by the
employee to the broker, and pays the difference to the
employee.
Since the BE has gone from the Employer's account to an
account used for the benefit of the employee, the employer
will add the BE to the W-2 form of the employee and also
indicate the BE amount on the W-2 form box 12-V.
So the employee has ordinary wage income of BE when he
exercises.
He sells same day, so the broker generates a form 1099B to
report the sale of stock.
A 1099B means the employee will have to file Schedule D
reporting the sale of this stock for FMV less broker
commission if net sales price is reported, or FMV if gross
is reported.
In either case, Cost is FMV modulo the broker commission.
The net result on schedule D is a small short term loss
about equal to the brokers commission.
There is no particular tax advantage to hold NQSOs more than
30 microseconds, much less more than one year.
There might be other reasons why the stock might want to be
retained, but almost everyone who has NQSOs will do a same
day exercise and sale.
ISOs have an incentive (as you might have guessed by their
name) for holding more than 2 years from date of grant and
one year from exercise date. If so, the BE becomes part of
the long term capital gain, instead of ordinary income. On
the other hand the BE becomes income for AMT tax purposes.
Bottom line: From strictly a tax point of view, holders of
NSQOs would almost always want to do a same day exercise and
sale.
--
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
|
Posted by Katie on January 10, 2007, 9:38 pm
Please log in for more thread options kastnna wrote:
> I need a quick stock option refresher course please!
>
> I've got a client with about 11,000 stock options in
> Southern Co (SO). The grant prices vary, but it will cost
> him $200,000 to exercise the options (which he doesn't have
> in cash). Once purchased, the shares can be redeemed for
> about $425K. That's a $225K gain before taxes. This is a
> Non-Qual grant, not an ISO.
>
> This is my understanding. Please correct if necessary. If he
> does a cashless "exercise and sell" transaction, he will buy
> and immediately sell all 11,000 shares and the $225K profit
> will be taxed as ordinary income. But he will have the
> remaining cash in his pocket.
>
> If he does a cashless "exercise and sell to cover", he will
> buy all 11,000 shares and only sell enough to pay the $200K
> it cost him to buy. The $225k gain will be left in stock
> certs for 13 months and then liquidated. This will cause the
> $225K gain to be taxed at Capital Gains rates. The downside
> is that he is subject to the stock volatility for 13 months
> AND he doesn't have the cash in hand.
>
> We are leaning towards option 2, but I want to make sure I
> have the taxes correct.
If these are nonqualified stock options, I don't think your
Option 2 will work. Assuming the options had no readily
determinable FMV at the date of grant, the employee has
ordinary income (compensation) at the date of exercise to
the extent of the "bargain element" -- the difference
between the FMV of the stock at the date of exercise and the
strike price. So the $225 gain will be ordinary income,
included in his W-2. If he sells enough of the stock to
cover the $200,000 cost, he'll sell about 5,176 shares,
resulting in little or no gain or loss since his basis will
be stepped up to the FMV at the date of exercise. He'll keep
the remaining shares with a basis of approximately $38.60
per share (the FMV at date of exercise) and have capital
gain or loss on their subsequent sale.
The difference between an NSO and an ISO is that no income
is recognized on an ISO at the date of exercise (although
the bargain element is included in alternative minimum
taxable income). If these were ISOs, he would have a
disqualifying disposition with respect to the shares that
were sold immediately upon exercise, resulting in ordinary
income. He'd sell approximately 5,176 shares at about
$38.60 per share, for which he paid approximately $18.18 per
share, resulting in a gain of approximately $105,800 which
would be ordinary income. He would still have the rest of
the shares with a basis of $18.18 per share. If he held
them for the statutory period, he would have capital gain to
the extent of the excess of the sale price over $18.18 per
share.
Katie in San Diego
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
|
Posted by Katie on January 10, 2007, 9:38 pm
Please log in for more thread options kastnna wrote:
> I need a quick stock option refresher course please!
>
> I've got a client with about 11,000 stock options in
> Southern Co (SO). The grant prices vary, but it will cost
> him $200,000 to exercise the options (which he doesn't have
> in cash). Once purchased, the shares can be redeemed for
> about $425K. That's a $225K gain before taxes. This is a
> Non-Qual grant, not an ISO.
>
> This is my understanding. Please correct if necessary. If he
> does a cashless "exercise and sell" transaction, he will buy
> and immediately sell all 11,000 shares and the $225K profit
> will be taxed as ordinary income. But he will have the
> remaining cash in his pocket.
>
> If he does a cashless "exercise and sell to cover", he will
> buy all 11,000 shares and only sell enough to pay the $200K
> it cost him to buy. The $225k gain will be left in stock
> certs for 13 months and then liquidated. This will cause the
> $225K gain to be taxed at Capital Gains rates. The downside
> is that he is subject to the stock volatility for 13 months
> AND he doesn't have the cash in hand.
>
> We are leaning towards option 2, but I want to make sure I
> have the taxes correct.
If these are nonqualified stock options, I don't think your
Option 2 will work. Assuming the options had no readily
determinable FMV at the date of grant, the employee has
ordinary income (compensation) at the date of exercise to
the extent of the "bargain element" -- the difference
between the FMV of the stock at the date of exercise and the
strike price. So the $225 gain will be ordinary income,
included in his W-2. If he sells enough of the stock to
cover the $200,000 cost, he'll sell about 5,176 shares,
resulting in little or no gain or loss since his basis will
be stepped up to the FMV at the date of exercise. He'll keep
the remaining shares with a basis of approximately $38.60
per share (the FMV at date of exercise) and have capital
gain or loss on their subsequent sale.
The difference between an NSO and an ISO is that no income
is recognized on an ISO at the date of exercise (although
the bargain element is included in alternative minimum
taxable income). If these were ISOs, he would have a
disqualifying disposition with respect to the shares that
were sold immediately upon exercise, resulting in ordinary
income. He'd sell approximately 5,176 shares at about
$38.60 per share, for which he paid approximately $18.18 per
share, resulting in a gain of approximately $105,800 which
would be ordinary income. He would still have the rest of
the shares with a basis of $18.18 per share. If he held
them for the statutory period, he would have capital gain to
the extent of the excess of the sale price over $18.18 per
share.
Katie in San Diego
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
|
| Similar Threads | Posted | | Exercise stock options 9 years after leaving employer | April 4, 2008, 12:14 am |
| Is interest paymennt on loan to exercise NQ stock options mdeductible?i | April 25, 2006, 7:49 am |
| Can I ever get out of AMT hell (after a tax-naive ISO exercise) | February 14, 2007, 9:42 pm |
| Re: Can I ever get out of AMT hell (after a tax-naive ISO exercise) | February 18, 2007, 3:11 am |
| Stock Options | February 18, 2007, 9:51 pm |
| Phantom Stock | May 10, 2007, 11:54 pm |
| stock options | April 15, 2006, 2:59 am |
| Stock Dividend | May 29, 2008, 9:30 pm |
| Re: Gift of appreciated stock | October 22, 2006, 5:36 am |
| Re: Gift of appreciated stock | October 22, 2006, 5:36 am |
|
|
Yahoo! 
Google 
Windows Live 
del.icio.us 
digg 
Netscape 
XML Sitemap