The Tax Questions Blog

Posts Tagged ‘options’

Question: Taxation - Stock Option Plans ??? ?

Hi,

I wanted to know what happens to your taxable income when :

the options granted from an employer to acquire say, 1000 shares are sold at 12$.
Say now that the FMV = $10.00 at this time. (all this in 2006)
When I exercise my options, the FMV = 18.25. (2008)

what would be my capital gain? Wouldn't it be a capital loss?

Thanks in advance !
So I just calculated what I think is right and this is what I amount to:
FMV = 18,250
ACB = (10,000)
increase in net income for tax purposes = $8,250
deduction (1/2 X 8,250)
increase in taxable income = 4,125$

Is this right?

Answer: It depends on what type of stock option this is - Nonstatutory or Statutory (ESPP or ISO).

If it is a Nonstatutory Stock option the most common result is compensation income on the difference between the exercise price and the FMV at the time of exercise. In the example you provided this would amount to $18250 less the exercise price $10,000 (1000 shares @ $10 ea.) which would increase your taxable income on your W-2 by $8250. You now have a cost basis in the stock of $18,250 so if immediately sold the 1000 shares at $18.25 per share you would recognize no capital gain or loss even though the sale is still reportable on Sch D.

If this was an employee stock purchase plan, ESPP, it would depend on timing. No compensation income is reportable if the stock is not disposed of within two years after the grant or within one year after the excerise date and at all times during the period beginning with the grant date and ending on the date three months prior to the excerise the optionee is an employee of the corporation granting the option.
In your example if you had a qualified disposition----meaning you met the criteria I explained above---you would have to recoginize $2 per share as ordinary income (I am assuming your example is saying your excerise price is $10 per share and the FMV at the time of grant is $12 per share) this is your orginal bargain. You would have a capital gain of $6.25 per share or $6250 since your basis is the original $10 per share plus the $2 orginal bargain reported as ordinary income.

If this is an ISO, incentive stock option, the entire gain from the sale of the stock may be treated as capital gain, even though the stock was acquired at a cost of less than FMV. It has to meet the same holding requirements as the ESPP does to qualify. In this example the stock would have to be held for more than a year after you excerise the option and the $8.25 gain per share would be taxed at the favorable capital gains rate.

Hope this helps.

EXTEND & PRETEND: A Matter of National Security

There is something seriously wrong in America . We all sense it, but few in the mainstream media are willing to touch it or can effectively articulate it within the public’s sound-bite oriented attention span.

MeltDown #421 EMERGENCY ECONOMIC STABILIZATION

Question: ISO Stock options, how does it work? Need opinions please!?

Hi All,
In the process of doing our taxes and also looking for another accountant. He appears to be confused!
Anwyay, my wife cashed in on ISO stock options from her company. She did a same day sale of the stock.
On her W2, the amount we got shows up as NON-TAXABLE.

Ive been learning that ISO is taxed on capital gains and not income hence why the W2 says that.
So if its based on capital gains, is it long term or short term?
She was issued stock option ISO shares in beginning of 2005 but did not exercise them until March of 2007 (same day sale).

What constitutes a long term or short term? Is her scenario a long term since she had them since 05?
Or did she need to buy them, then hold for a year to be considered long term capital gains?

This info is good to know as I have ISO and NONQUALS as well and will hopefully sell in the future.

Again, this is informational only and we are seeking a new tax person who understands this.

Thanks All!
Chip

Answer: Actually you've got all of this backwards.

Your wife's same day sale is all in the W-2, box 1 as ordinary income because she did not hold the stock for at least 1 year and a day after she exercised the stock option. You do not modify the W-2 and enter it as is onto the tax return. If there is an amount in box 14 with a description), it's just documenting the fact that the amount is in there.

Since the spread (FMV - option price) is already included in income, her basis for schedule D is increased by the spread back up to the FMV. When the schedule D is done, there will be a tiny loss on line 1 (short term capital loss) since she doesn't pay tax on the fees charged by the brokerage house for doing the same day sale.

Your wife could only have gotten long term capital gain treatment if she'd exercised the stock option, held it for a year and then sold it. Keep in mind that with ISOs, if you exercise the stock option and keep the stock past 12/31, you add the spread to your AMT income and can wind up owing some AMT if the gain is substantial. You get the money back as a credit later, but it can take a while.

Destiny Resource Services Corp. Announces Shareholder Approval of Merger With Logan Oil Tools and 2009 Results

CALGARY, ALBERTA--(Marketwire - Feb. 26, 2010) - Destiny Resource Services Corp. ("Destiny") (TSX:DSC) announces its shareholders overwhelmingly approved the previously announced merger with Logan Holdings, Inc. (the parent company of Logan Oil Tools) at a Special Meeting held today. The transaction will be effective March 1, 2010. D

Authors@Google: Ramit Sethi