For you stock option savy folks

[Stee6043]

I'm wondering if I am properly understanding a typical strategy with employer stock option grants. I've outlined what I think I know below but would welcome any guidance or comments from the more experienced among us.

Let's say you receive options annually that vest 20% a year for 5 years. Let's assume you're in the 5th year of receiving such grants. You've now got 100 shares fully vested that were issued to you at $10 (strike price?) but are now worth $50 (exercise price, if exercised now) per share.

Were I to exercise those 100 shares today I'd pay standard income tax on the $40 per share difference between strike and exercise this year. If I sell immediately, that's my total tax liability for those shares, normal income.

But if I exercise those shares this year, pay the standard income tax on the $40, then hold for 10 more years I'd only pay capital gains on the increase in value from $50 (today's share price) and whatever I'd sell for in 10 years.

Do I have that right? If so, from a tax perspective, I should immediately exercise all options as soon as they vest, even if I plan to hold for a long period of time, assuming I have full confidence of long term growth? Of course I'd have to pay attention to the implication on tax brackets in any year I'd start exercising the options.

Am I even in the ballpark here? Thanks in advance!!

 

[bobeast]

Different companies handle it differently. My company sells enough shares to withhold tax on the vested amount so the actual number of shares I get is fewer than the original award, but the tax has already been paid. If I keep those remaining shares for over a year, and THEN sell them, I only pay long term capital gains on the amount they increased since they originally vested. If I sell them immediately, it is short term capital gains (your standard tax rate). That profit is calculated as the current value minus the value on vestment date (Cost Basis), which is likely minimal since the shares haven't had much of a chance to increase in value.

Some companies transfer the entire allotment directly to you which creates a tax liability you need to take care of yourself at the next filing and is treated as ordinary income.

This is how RSUs work. Actual stock options are treated as ordinary income on the vestment date. Once that liability has been met, you are further responsible for short or long term capital gains, should they increase in value before you sell them.