if I have strong evidence that the company will do well in the future, would it make sense for me to exercise when the actual price of the stock is close to the exercise price? Would I theoretically avoid the income tax and only need to pay capital gains?
For NQSOs: Income tax is realized when options are exercised. Then say I hold on to the shares for a certain amount of time for whatever reason, the shares have appreciated in value. When I sell, would that just be LT gains tax? Thanks!
You said there’s no benefit of exercise and hold since the tax happens on exercise, but if I exercise and hold for >1 year do I not get the benefit of a long-term capital gains tax on the eventual sale of the stock?
Yes, that would be true for any additional gain above the stock price at exercise (in this example, gains above $20/share). Here is a more in-depth article that explains why it's generally not a good idea to exercise & then hold non-qualified stock options: stockopter.com/nqso-no-no Hope that helps! -Mike.
super helpful! does that mean if people exercise and sell the NSO the same time there is no way to offset the income tax through short term long term capital loss?
Thanks! You're right that if you exercise & sell at the same time, there would be no capital loss (or gain) on those NSOs, just income. If you have other capital losses, those can be used to offset up to $3K of income. But it sounds like you're asking if you should hold the shares longer & sell at a lower price to offset income, but that'd be a bad idea & you'd not come out ahead compared to just selling immediately.
Yes, non-statutory stock option is another term for non-qualified options. The best book I've read on the topic of equity compensation is called Consider Your Options by Kaye Thomas
You have the choice whether or not to exercise any vested options. Check your grant document, but the most common is that you'd have 3 months from your last day. Since its private, you'd have pay cash for the exercise and are making the bet that the company goes public / gets acquired, etc. Also remember that any difference between the exercise price and fair market value is considered income, so will have taxes due as well.
Where does the withholding come from? In this hypothetical example, if i exercise the 1000 options at $10, I have to pay $10k for the exercise. Do I have to pay more to cover the tax witholding also?
For the reasons I mention at 9:20, you're usually not needing to bring cash to exercise your NSOs b/c you're also immediately selling them & getting the difference. Most platforms let you do that in one request. If you want to exercise & hold, you do either have to bring cash, or you can exercise & immediately sell some of your options to cover the cost of exercising & holding others.
No, not for non-qualified options. Income is realized when you exercise. If you hold them and sell later for a loss, that's capital loss. It can only reduce income up to $3K and offset other capital gains. Any losses you don't use carry forward to the next year.
@@JavaWealth thanks . So the company has given me nso as an advisor. Does it have any time line to execute ? Expiry grant says 2032 . I believe in company so thinking to taking a loss ..
@@niileshraaje9061 The 2032 expiration would be for how long you have to exercise the stock options. Once you've exercised the option, you now own the stock & there's no expiration or anything on that.
@@JavaWealth what’s confusing is that I see term as 10 years and then clauses - voluntary termination- 3 months , involuntary- 3 months , termination with cause - 0 , death and disability- 12 months . I was allotted the NSO post termination as advisor to company . Not sure how long I have before I execute
Check your grant doc, but it's most common that you have 3 months from your last day to exercise any vested options. In some cases, this can be negotiated.
Sorry, I don't have the expertise to answer that. I'd recommend working with a financial/tax pro in the country where you're consulting. If you're asking as a US citizen working abroad or vice versa, here is a network of financial advisors that specialize in cross-border planning: theciganetwork.com/public-member-directory
What happens if I find a buyer who is willing to pay more than the stock price? Can I sell above the stock price? And if so, what would be the tax situation there?
Hopefully after a year you have found your answer. Your stock administrator in the course of the transaction will require disclosure of this inflated value and you'll be taxed based on that larger number, rather than the 409a valuation. What I have been unable to find out is how you are taxed if you need to sell BELOW 409a and if you get taxed at that even if being unable to realize that gain.
As soon as you exercise it, then you're realizing income and are going to be taxed on the spread between the strike price & price at exercise (1:45). If you continue to hold onto the stock, it's treated exactly like any other investment where your cost basis is set to the stock price at exercise & you'll realize capital gains/losses relative to your cost basis when you do sell it. So in this example at 9:21, it's exercised at $20. If you hold and sell it > a year later at $25, you'll realize $5 of long-term capital gains.
@@JavaWealth I get taxed at the difference of the strike price compared to the FMV at time of exercising, not its current value? e.g. Exercised at $0.50, when FMV of $5.00, but now its worth $15 (all in same year). Do I get taxed at the spread of $5-$0.5 or $15--$0.5?
In your example, you'll have $4.50/share that will get taxed as ordinary income. If you also sell this year at $15, you'd have $10 of short-term capital gains (which is taxed at the same rates as income).
