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NFT: Employee Stock Options

ManningLobsItBurressAlone : 5/11/2021 9:17 am
Just looking to clarify something regarding some employee stock options for those who are knowledgeable on this topic. Was lucky enough to get a few different type of options, but the one's I currently have a question on are NQSOs.

I understand that these have no special tax treatment and at the time of exercise, you would pay income tax on the spread between the exercise price, and the market value at the time of exercise. This would then bring up your cost basis to the price at the time of exercise. Now say you go to sell a week later, and the stock price is down, would this go down as a capital loss?

For example, have an exercise price of $25, at the time of exercise the stock is trading at $100. I'd pay the income tax on the spread from $25 to $100. A week later the stock is trading at $90, and I go to sell. Would that be a capital loss on the spread from $100 to $90?

If anyone has tips on options, that'd be great to hear as well.
options at 25 means you can buy the stock at 25  
cjac : 5/11/2021 9:19 am : link
did you sell at 100 or 90. the capital gain would be either $75 per share or $65 per share depending on where you sold it. Its not when you exercise the option, its when you sell it.
I think cjac is wrong  
pjcas18 : 5/11/2021 9:29 am : link
the spread on an NQSO (difference between exercise price and price on date you exercise the option) is taxed as income.

The capital gain on a NQSO is when it's sold and it's the difference between the price when you exercise them and when you sell them.

also, while do believe it qualifies as a capital loss in your scenario there is no benefit to a capital loss, it's only useful to offset a capital gain. So you can carry a capital loss forward until/if you have a capital gain, but in an of itself is not of any tax benefit.

but I am not a CPA
I may be wrong  
cjac : 5/11/2021 9:32 am : link
not an expert on NQSOs

i'll go back to talking about where DJ ranks in NFCE Qbs
They're two separate transactions  
JonC : 5/11/2021 9:34 am : link
You'd pay tax as if it were regular income on $75 for the first transaction, and $65 for the second. Not seeing how a loss would be present.
RE: They're two separate transactions  
ManningLobsItBurressAlone : 5/11/2021 9:55 am : link
In comment 15260404 JonC said:
Quote:
You'd pay tax as if it were regular income on $75 for the first transaction, and $65 for the second. Not seeing how a loss would be present.


I thought the first transaction (the exercise), would reset the cost basis to the market price at the time of exercise ($100). I'd pay income tax on the spread from $25 to $100. If I go to sell a week later, wouldn't that go down as a capital loss, since my new cost basis is $100, and the stock is now trading at $90?
Your exercise/strike price is $25  
JonC : 5/11/2021 9:58 am : link
I've not seen a scenario before where that figure changes.
RE: They're two separate transactions  
Mad Mike : 5/11/2021 9:58 am : link
In comment 15260404 JonC said:
Quote:
You'd pay tax as if it were regular income on $75 for the first transaction, and $65 for the second. Not seeing how a loss would be present.

No. Once income is realized upon the grant of the option, your basis in the stock is $100. Upon exercise and sale at $90, you haven't realized another $65 in gain, you've realized a $10 capital loss. How could someone possibly have $140 in taxable income from exercising an option at $25 and then selling the stock at $90?

ManningLobsItBurressAlone, what you've suggested seems generally correct. But you really should check with a plan administrator about the specifics - there can be lots of different treatments depending on the term of a plan. And as pj points out, a capital loss does not simply offset the ordinary income you'd recognize at the time of grant.
the cost basis  
upstatenyg : 5/11/2021 10:00 am : link
is the strike price of the option, period.

if you sell immeditaley, you pay regular short term gains on the spread between the strike price and the sale price. reg short term gains are your reg tax rate.

if you exercise the option but don't sell right away, you then own the stock at the strike price (no reset). from then on, it is like any other stock, if you hold for one year, you get LT gains rate which is lower. if it goes down, you can claim loss.

NOTE, if you don't sell when you exercise, you have to pay for the stock. like 100 shares of a 25 stock, you will have to pony up 2500.
RE: RE: They're two separate transactions  
JonC : 5/11/2021 10:09 am : link
In comment 15260441 Mad Mike said:
Quote:
In comment 15260404 JonC said:


Quote:


You'd pay tax as if it were regular income on $75 for the first transaction, and $65 for the second. Not seeing how a loss would be present.


No. Once income is realized upon the grant of the option, your basis in the stock is $100. Upon exercise and sale at $90, you haven't realized another $65 in gain, you've realized a $10 capital loss. How could someone possibly have $140 in taxable income from exercising an option at $25 and then selling the stock at $90?

ManningLobsItBurressAlone, what you've suggested seems generally correct. But you really should check with a plan administrator about the specifics - there can be lots of different treatments depending on the term of a plan. And as pj points out, a capital loss does not simply offset the ordinary income you'd recognize at the time of grant.


I don't follow your path to $140. This is why I'm an engineer and not in Finance. My history with stock options is the strike price is the key. First sale would be the difference between 25 and 100, and the second separate transaction would be the difference between 25 and 90.
only tip I have  
pjcas18 : 5/11/2021 10:10 am : link
is with my company I believe my NQSO become qualified (taxed as capital gain instead of income) if I hold them for a while before exercising or selling - not sure which (1 year?)

I don't let that drive my decisions, but thought i'd mention in case yours work that way too (and you believe your company stock will increase)
RE: the cost basis  
JonC : 5/11/2021 10:10 am : link
In comment 15260443 upstatenyg said:
Quote:
is the strike price of the option, period.


That's what I'm familiar with.
I think we're talking about two different types of stock options  
JonC : 5/11/2021 10:19 am : link
The stock options I've had/have you exercise (sell at $100) and it's W2 income on the difference between strike price ($25) and sale price ($100). There are different types of stock options out there.
ManningLobs It  
pjcas18 : 5/11/2021 10:22 am : link
are your NQSO's RSUs?
This graphic  
pjcas18 : 5/11/2021 10:30 am : link
shows basically what to expect, mine are RSU's not NQSOs, but if I sell my RSU's immediately after vesting they are NQ, if I hold them they become qualified.

Your column is NQO

i have the answer  
cjac : 5/11/2021 10:34 am : link
so once you exercise a NQSO the amount between the strike price and where its trading would be taxed as ordinary income. so your $75 per share is income. if you wait and sell it at $90, you can write off that $10 loss per share against any capital gains.

Thanks for  
ManningLobsItBurressAlone : 5/11/2021 10:34 am : link
all the feedback so far.

PJ- I believe they are straight NQSO's, looks like RSU's are in a different block.
RE: i have the answer  
pjcas18 : 5/11/2021 10:34 am : link
In comment 15260474 cjac said:
Quote:
so once you exercise a NQSO the amount between the strike price and where its trading would be taxed as ordinary income. so your $75 per share is income. if you wait and sell it at $90, you can write off that $10 loss per share against any capital gains.


lol, that's what I said.
RE: RE: i have the answer  
cjac : 5/11/2021 10:38 am : link
In comment 15260477 pjcas18 said:
Quote:
In comment 15260474 cjac said:


Quote:


so once you exercise a NQSO the amount between the strike price and where its trading would be taxed as ordinary income. so your $75 per share is income. if you wait and sell it at $90, you can write off that $10 loss per share against any capital gains.




lol, that's what I said.


Well, i never said you were wrong
RE: This graphic  
markky : 5/11/2021 11:41 am : link
In comment 15260472 pjcas18 said:
Quote:
shows basically what to expect, mine are RSU's not NQSOs, but if I sell my RSU's immediately after vesting they are NQ, if I hold them they become qualified.

Your column is NQO



and if you have ISOs you should take the AMT warning seriously. If you exercise and hold and the stock has a significant fall you might end up paying taxes on income you never realize and have carryover capital losses that could take years (or a lifetime) to offset against gains.
Short term capital loss of 3k per yr  
Payasdaddy : 5/11/2021 11:49 am : link
Or offset vs gains
As a practical matter  
Ron from Ninerland : 5/11/2021 3:52 pm : link
You should not exercise and hold NQSO's You should exercise and sell. Since the capital gains are effective at exercise time you take a huge risk by holding the stock. At lot of people out here got burned during the dot com bust in the early 2000's. They exercised and held, the stocks quickly tanked and they couldn't afford their tax bills.

Sure, they had huge capital losses, but you can only write off $3000 per year against ordinary income. The rest has to be carried over.

Another reason to exercise and sell is that you get whacked for social security tax on the gains.
Short term  
SomeFan : 5/11/2021 4:03 pm : link
Capital loss of 10
And the 10 s/t capital loss  
SomeFan : 5/11/2021 4:06 pm : link
Cannot be used against the ordinary income generated on exercise of the option.
RE: As a practical matter  
ManningLobsItBurressAlone : 5/11/2021 5:36 pm : link
In comment 15260960 Ron from Ninerland said:
Quote:
You should not exercise and hold NQSO's You should exercise and sell. Since the capital gains are effective at exercise time you take a huge risk by holding the stock. At lot of people out here got burned during the dot com bust in the early 2000's. They exercised and held, the stocks quickly tanked and they couldn't afford their tax bills.

Sure, they had huge capital losses, but you can only write off $3000 per year against ordinary income. The rest has to be carried over.

Another reason to exercise and sell is that you get whacked for social security tax on the gains.


Appreciate everyone's feedback on this topic.

Question for you Ron regarding this post. Say the exercise price is at $25, the stock is trading at $100, which is when I exercise. I've already paid the ordinary income tax on that gain. Assuming the stock is trading at $90 now, as I used in the above example, your advice would be to immediately sell, I would have the difference from $100 (market value at time of exercise), to $90 (current market value), as a capital loss. But still take that "earnings."

If I have a strong belief that the stock is going to increase over the long term, that would be a scenario where I would exercise and hold, right?
The tax bill from dot.coms  
Payasdaddy : 5/11/2021 7:16 pm : link
Was that it’s a preference item for amt
That is not as prevalent now after the 2017 tax act
Amt and such not nearly as much of an issue unless you’re talking millions
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