What does it mean to exercise my stock options
Or maybe you work at an old-fashioned profit-making enterprise that stock awarded you stock options for superior mean. Either way, you have to decide when to exercise your options. Like most important things in life, the decision is a judgment call. By exercising now, you can potentially reduce your overall tax bill. But you will also have an immediate tax cost. Plus, you run options risk that the stock will dive while you are hanging on to it. Of course, these numbers could change if the Trump tax plan is enacted. For the more-than-one-year rule, start counting on the day after you receive the shares and count the day you sell. In contrast, when you sell after a shorter ownership period, post-exercise gains are taxed at your ordinary rate, which could be as high as If you have incentive stock options ISOsthe rules are stricter. To get favorable long-term capital gain treatment, you must sell the shares more than two years after the option grant date and have owned them for over a year exercise with the day after the exercise date. What that higher-income folks may also owe the 3. You can clearly see the tax advantage of exercising right now if you think the shares will go up and you expect to hold on long enough to take your profits in the form of long-term capital gains. First, you need money. Second, bad tax things can happen on the exercise date. With an NQSO, the spread difference between exercise price and market price on the date of exercise is taxed as salary. That means you get taxed at your regular rate which can be as high as Of course, this is exercise a big deal if you can exercise when there is little or no spread. However, your option-vesting schedule may prevent what from doing so. However, the spread is treated as income for alternative minimum tax AMT purposes. That could throw you into the AMT-paying mode. Again, this concern is mitigated if you can exercise when there is little or no spread. Third, other bad tax things can happen after the exercise date. What if the stock declines? In the case of NQSO shares, selling for less than the mean price at the time you exercised means a capital loss. If you have other exercise gains for the year, you can at least cut your what bill by taking the loss mean your profits. Given all the potential negative outcomes of an early option exercise, I advocate the last-minute strategy. The last minute mean when the stock has risen to the point where you are ready to unload — or just before the option expiration date, options comes first. Now you can exercise without any qualms. The tax cost, though, will be higher mean much higher. Go ahead, but remember this: This advertisement is provided by Options, which compiles rate data from more than 4, financial institutions. 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