Stock options provide income and opportunity for most people to profit if the company does well. But, over 22% of options contracts expire without any value. Options owners make other mistakes like selling vested shares early, not protecting gains when options appreciate, waiting until the last minute to exercise options at expiration, planning for taxes too late, and not considering risk and portfolio 澳洲幸运5官方开奖结果体彩网:diversification issues. We will help you manage your stock options most effectively.

Taxation

There is no 澳洲幸运5官方开奖结果体彩网:tax liability when you exercise the options and hold the stock until you sell it or make a non-sale disqualifying disposition. When you sell the stock, the 𒀰difference between the amount you paid and the amount you receive from the sale is taxed as capital gains (or loss). 

To qualify for 澳洲幸运5官方开奖结果体彩网:long-term capital gains treatment, you must hold 澳洲幸运5官方开奖结果体彩网:incentive stock options (ISO) shares for at least one year and a day from the date of exercise. If you sell the shares in less than 12 months you will have taxable ordinary income. The taxable amount (or loss) is generally measured by the difference between the fair market value on the exercise date and the option price. However, exercising an ISO can trigger the 澳洲幸运5官方开奖结果体彩网:alternative minimum tax (AMT).

When you exercise 澳洲幸运5官方开奖结果体彩网:non-qualified stock options (NSO), you may be subject to taxes at the time of exercise and again at the sale of the stock. Gains are taxed as 澳洲幸运5官方开奖结果体彩网:ordinary income. But, if you hold the stock and sell it in the future, you would pay capital gains tax on any additional appreciation (meaning any appreciation of the stock from the price at exercise). Remember that long-term capital gains treatment only applies if the stock is held for more than one year from the date of exercise.

Cashless Exercise

A 澳洲幸运5官方开奖结果体彩网:cashless exercise occurs when any vested options are exercised at a ☂predefined price or expiration without the exchange of physical cash. With a cashless exercise, there is no out-of-pocket cost. Instead, you use shares subject to exercising to cover your exercising costs.

The options under a cashless exercise are exercised and the shares are sold immediately. The net proceeds (澳洲幸运5官方开奖结果体彩网:market price less the cost of the option, transaction fees, and taxes) are deposited in your acco✱unt several days later.

Cashless Hold

A cashless hold is when you exercise enough options to purchase the remaining shares without using additional cash. In this strategy, you simultaneously exercise and sell enough stock to cover the cost of exercising the options (and taxes). You receive the remaining shares and any 澳洲幸运5官方开奖结果体彩网:fractional shares or partial shares will be paid in cash.

Underlying Stock Price

Setting up a plan to track the price of the underlying stock and systematically exercising vested options that are in the money (ITM) before expiration or at a set target price to capture the gain. If the stock price continues to increase, continue exercising additional🙈 options.

This is a situation where you do not want taxes to drive your decision. You may be better off exercising the options and moving the stock to a brokerage account where you can place 澳洲幸运5官方开奖结果体彩网:stop orders to protect your gain if the stock’s price suddenly plunges. If the price of the stock plunges and the options are left unexꦚercised, you would have had no gain.

Timing the Exercise

Timing the exercise of options to 澳洲幸运5官方开奖结果体彩网:help manage taxes. Most companies withhold some taxes when options are exercised. However, that may not be enough to cover your full tax liability. If options are exercised in January, February, or March, the stock can be held for 12 months, allowing the shares to be sold and receive 澳洲幸运5官方开奖结果体彩网:capital gains tax treat♏ment, and then sold in the next calendar year to help ♋cover any taxes due.

For example, exercise options in February 2024 and then sell the shares in March 2025. The 2024 taxes from the initial exercise are not due until April 2025. If you use this strategy, place stop orders in case the stock drops in price. Any gain will be taxed as ordinary income, but you will not have to come up with other funds to cover your tax obligation.

Stock Swaps

Consider a 澳洲幸运5官方开奖结果体彩网:stock swap if your plan allows it. In this strategy, the option exercise is f💯unded 🦹using company stock you already own. A stock swap is a tax-deferred exchange. You surrender enough shares of stock to equal the exercise price of the options you plan to exercise. The cost basis and holding period in the old shares carry over to the new shares. Any additional bargained element would be taxable income.

This avoids any 澳洲幸运5官方开奖结果体彩网:tax liability on the unrealized appr🎃eciation in the old shares until the stock is ultimately sold. It also will provide the funds to exercise the options without having to tie up additional capital.

Significant Appreciation

Make an 澳洲幸运5官方开奖结果体彩网:83(b) election if you expect the company stock to significant♑ly appreciate. In this strategy, you exercise the options before vesting. The bargain element is taxed as if the options were vested. Once the options vest and the ho🅠lding period requirements are fulfilled, any gain is taxed at capital gain rates.

This can help avoid AMT if the election is made when the bargained element is small. Bear in mind that although the options are exercised, the owner has no control over them until they are fully ve🗹sted. As such, there is a risk that the stock will not appreciate or drop.

Gift NSOs

Gift NSOs if the plan allows. The transfer is not considered a completed gift until the options vest. This means the donor is liable for any 澳洲幸运5官方开奖结果体彩网:income taxes due on the bargained element.

This strategy allows you to remove the value of the options from your estate and transfer the future appreciation to others, possibly in a lower 澳洲幸运5官方开奖结果体彩网:tax bracket.

Disqualifying Disposition

If you have already exercised ISOs and the price of the underlying stock drops, consider a 澳洲幸运5官方开奖结果体彩网:disqualifying disposition. This disqualifies the ISOs from receiving favorable tax 💞treatment—in essence turning them into NSOs. Options become disqualified after exercising by selling the stock before meeting holding period requirements.

In some cases, an intentional disqualifying disposition could be used if ISOs were exercised and then the price of the stock plunged before the shares were sold. The exercise would be taxed as ordinary income avoiding the AMT issue.

The Bottom Line

Options are a great incentive and need to be managed. Depending on your financial situation, employing more than one strategy may be the best approach. And always consider portfolio diversification and reducing risk by not building a concentrated position (more than 5% of your investments) in one stock.