Selling NQ Stock Options & Tax Brackets

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Selling NQ Stock Options & Tax Brackets

Postby berg » Tue May 14, 2013 11:37 am

Hi all -

I'm fortunate enough to have some stock options and RSU's I have been sitting on for awhile that have vested. I'm in an open trade window and our share price is pretty high. I live in Mass (for tax purposes).

I have about $13k of RSU's I have held long enough for long term capital gains. And another $12k that would hit short term gains (would be long term in 6 more months).

Then I have some options I haven't exercised with different strike prices. I have about 1900 options worth $66k and 1900 worth about $30k.

All told, I have around $121k options I could sell today (before taxes), with $108k being short term.

I'm married filing jointly and would expect my after deduction gross to be around $175k for 2013. Looking at 2013 tax brackets, it looks like if I sell it all now, about $48k would be taxes at 28% and $60k would be taxed at 33%.

I'm wondering if I should try to sell up to the 28% tax bracket and hold some stock and try to limit the tax liability over several years. Of course, I do have more stock vesting, but you never know if I'll be here for it to vest.

And here is the final fact, which I think will make most of you give me the same advice...even assuming the tax hit I'm going to take, if I sell all now, I might end up with still upwards of $80k. Not including these options my net worth is $330k. So selling these options, even with taxes would make up 20% of my net worth, which is pretty significant.

Should I forget worrying about taxes and just liquidate to take the known increase in net worth?

Thanks!
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Re: Selling NQ Stock Options & Tax Brackets

Postby mhc » Tue May 14, 2013 11:49 am

When selling options or rsu's, I never worry about taxes. There is no way to avoid the normal income taxes on RSU's unless you refuse the grant, which would normally be foolish.

I always sell all vested rsu's immediately. This results in ~$0 cap gains. Everything is normal income.

For NQ options, I exercise and sell same day. This results in ~$0 cap gains. Everything is normal income. There is some flexibility of when you exercise these to minimize taxes. When I get NQ options every year, I try to exercise one years options every year to smooth out my income.

I'm not sure how you are coming up with $108k short term gain.

I believe holding company stock is unwise because of the concentrated risk of the company stock and your job. Diversify immediately according to your AA.
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Re: Selling NQ Stock Options & Tax Brackets

Postby berg » Tue May 14, 2013 11:52 am

Thanks mhc. Sorry if I wasn't clear. The $108k isn't short term or long term. I know I have to pay taxes on the options when I exercise (regardless of when I sell). I guess the question was more, would you split the exercise timing ever to limit the income tax liability, since I know a big chunk of this will be taxes at a higher income tax bracket.

Thanks!
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Re: Selling NQ Stock Options & Tax Brackets

Postby dbr » Tue May 14, 2013 12:01 pm

As mentioned most people would have a series of options expiring in successive years. Typically people exercise such option shortly before they expire, year after year. If the math works out that one particular year has lower or higher income one might squeeze around the timing to match. One example is that a retiree might delay SS and time options to be wiped out the year before SS income raises the tax cost.
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Re: Selling NQ Stock Options & Tax Brackets

Postby berg » Tue May 14, 2013 12:09 pm

dbr wrote:As mentioned most people would have a series of options expiring in successive years. Typically people exercise such option shortly before they expire, year after year. If the math works out that one particular year has lower or higher income one might squeeze around the timing to match. One example is that a retiree might delay SS and time options to be wiped out the year before SS income raises the tax cost.


Would that be more of the strategy though when it makes up a smaller % of your net worth? These don't expire for awhile, but make up a healthy chunk of my net worth.
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Re: Selling NQ Stock Options & Tax Brackets

Postby TimesAWastin » Tue May 14, 2013 12:13 pm

I was in a similar situation, except that the options I had were expiring within the next year, and the total value was nowhere near yours. ;-) Nevertheless, it was enough for me to consider the tax consequences. Also, holding so much of my total investments in a single stock made me very nervous, once I had learned enough to be nervous about such things. In the end it was just enough that I could exercise them all and not fret too much, but it was worth considering taking only a portion now and a portion closer to expiry (it would've been next year).

I think it would be worth talking to a pro to really work out the numbers, but with that amount which could shove you into much higher taxbracket, splitting it across several years sounds like the right way to go.
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Re: Selling NQ Stock Options & Tax Brackets

Postby Sidney » Tue May 14, 2013 12:19 pm

TimesAWastin wrote:I think it would be worth talking to a pro to really work out the numbers, but with that amount which could shove you into much higher taxbracket, splitting it across several years sounds like the right way to go.

What I did was set a maximum dollar exposure at first. When I was very young and my net worth was fairly low, I let the NQ options dominate because I still had a lot of years to make up the difference. In effect, I pretty much ignored them in calculating my net worth. As I got older and was getting closer to retirement age, I managed them to not exceed the threshold dollar value. As each new grant came in to the picture or if the in-the-money value exceeded my threshold, I banked the excess (exercised). Over time I banked these funds to bonds so as I grew closer to my retirement age I was increasing my bond mix to my desired end allocation. I was always in or near the maximum tax bracket so that was never a factor.
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Re: Selling NQ Stock Options & Tax Brackets

Postby berg » Tue May 14, 2013 12:46 pm

Well, if I stay with this company, I will have more vesting, so will continue to be in this situation. The only reasons I could think I'd have a lower income and should try to shield some of the tax burden would be:


    I leave the company and am no longer vesting, so I have a lower income when selling shares
    The stock value tanks, leaving me with less of a burden (that would suck)
    My wife ( a public school teacher), could possibly take a year off when we have two children in the next 4-5 years (while this could lower the burden by a bracket seems like way to far away to be gambling with these shares
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Re: Selling NQ Stock Options & Tax Brackets

Postby dickenjb » Tue May 14, 2013 12:53 pm

RSU's should be sold the day they vest. Period.

NSO's - no way I would execute before year 5. After that I look at remaining time value as a fraction of Black & Scholes value - when it gets below about 20% I look to exercise & sell (cashless exercise).

As another poster has pointed out - it all gets taxed as ordinary income. Not ST cap gains. Not LT cap gains. Only ISO's qualify for cap gains treatment.
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Re: Selling NQ Stock Options & Tax Brackets

Postby Calm Man » Tue May 14, 2013 12:58 pm

mhc wrote:When selling options or rsu's, I never worry about taxes. There is no way to avoid the normal income taxes on RSU's unless you refuse the grant, which would normally be foolish.

I always sell all vested rsu's immediately. This results in ~$0 cap gains. Everything is normal income.

For NQ options, I exercise and sell same day. This results in ~$0 cap gains. Everything is normal income. There is some flexibility of when you exercise these to minimize taxes. When I get NQ options every year, I try to exercise one years options every year to smooth out my income.

I'm not sure how you are coming up with $108k short term gain.

I believe holding company stock is unwise because of the concentrated risk of the company stock and your job. Diversify immediately according to your AA.


MHC, this has been exactly my strategy for years. As a retiree I unfortunately am down to one final NQ option at a large pharma that I have to sell next year. Of course my next to last one I sold in January of this year when it hit an all time high and it is now another 20% higher and rising daily like everything else. But RSU and NQ grants should be flipped.
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Re: Selling NQ Stock Options & Tax Brackets

Postby berg » Tue May 14, 2013 1:03 pm

dickenjb wrote:
NSO's - no way I would execute before year 5. After that I look at remaining time value as a fraction of Black & Scholes value - when it gets below about 20% I look to exercise & sell (cashless exercise).

As another poster has pointed out - it all gets taxed as ordinary income. Not ST cap gains. Not LT cap gains. Only ISO's qualify for cap gains treatment.


I'm confused, even at 20% of my net worth, you'd hold on to this for another 5 years assuming the market will go up? I feel like I'm missing something.
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Re: Selling NQ Stock Options & Tax Brackets

Postby lazyfabs » Tue May 14, 2013 1:15 pm

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Re: Selling NQ Stock Options & Tax Brackets

Postby Wagnerjb » Tue May 14, 2013 1:31 pm

berg wrote:I'm married filing jointly and would expect my after deduction gross to be around $175k for 2013. Looking at 2013 tax brackets, it looks like if I sell it all now, about $48k would be taxes at 28% and $60k would be taxed at 33%.

I'm wondering if I should try to sell up to the 28% tax bracket and hold some stock and try to limit the tax liability over several years.


I like your idea of generating income to the top of the 28% bracket. Here is how I might implement:

a) Sell the vested RSU's with the long-term gain right now. You will pay 15% on the long-term gains, and this gives you immediate diversification.

b) Exercise some of your stock options - the older ones first. I would sell such that the gains took you to the top of the 28% bracket. This provides some immediate diversification and this - along with step (a) lessens the urgency to exercise the remaining stock options early (which destroys extrinsic value).

c) When the other RSU's convert to long-term gain, donate them to a Donor Advised Fund and take the entire charitable deduction against your income this year. This allows your stock option exercise to be larger and keeps your taxable income in the 28% bracket.

The goal might be to stay in the 28% bracket, but watch for other taxes. If your AGI is over a certain amount ($300,000 I believe) your personal exemptions and also itemized deductions begin to phase out. You will want to watch out for AMT as well. If your AGI is over $250,000 you will pay the 3.8% surtax on investment income.

Best wishes.
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Re: Selling NQ Stock Options & Tax Brackets

Postby berg » Tue May 14, 2013 1:52 pm

Wagnerjb wrote:
berg wrote:I'm married filing jointly and would expect my after deduction gross to be around $175k for 2013. Looking at 2013 tax brackets, it looks like if I sell it all now, about $48k would be taxes at 28% and $60k would be taxed at 33%.

I'm wondering if I should try to sell up to the 28% tax bracket and hold some stock and try to limit the tax liability over several years.


I like your idea of generating income to the top of the 28% bracket. Here is how I might implement:


b) Exercise some of your stock options - the older ones first. I would sell such that the gains took you to the top of the 28% bracket. This provides some immediate diversification and this - along with step (a) lessens the urgency to exercise the remaining stock options early (which destroys extrinsic value).

Best wishes.


Thanks, but if I'm estimating right, I'd only be selling about $30k of my options, still leaves over $70k on the table, which still feels like a big % of my net worth. Trying to make sure I think things through here, but do wonder if taking an additional 5% or so federal tax hit is worth it to ensure I get these assets as part of my net worth now (I'm 30 and my wife is 27) and continue to build up my net worth.
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Re: Selling NQ Stock Options & Tax Brackets

Postby Wagnerjb » Tue May 14, 2013 2:03 pm

berg wrote:I have about $13k of RSU's I have held long enough for long term capital gains. And another $12k that would hit short term gains (would be long term in 6 more months).


Can you kindly clarify for us these values? For most of us, we pay ordinary income tax on RSU shares when they vest. Of course, we can choose to continue holding the vested RSU shares, and they can then be eligible for long-term treatment after one year. Is that your situation? Or do you have an unusual plan and tax treatment?

The issue is whether you have a larger balance in RSU shares or not. For example, if you told us "I have $100K in RSU shares, with a long-term gain of $13K", this would be very different from telling us "I have $13K of shares I have held long-term, and the capital gain is a mere $1K". Can you help clear this up? It will impact how I view your urgency to sell this year.

Thanks!
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Re: Selling NQ Stock Options & Tax Brackets

Postby berg » Tue May 14, 2013 2:10 pm

Wagnerjb wrote:
berg wrote:I have about $13k of RSU's I have held long enough for long term capital gains. And another $12k that would hit short term gains (would be long term in 6 more months).


Can you kindly clarify for us these values? For most of us, we pay ordinary income tax on RSU shares when they vest. Of course, we can choose to continue holding the vested RSU shares, and they can then be eligible for long-term treatment after one year. Is that your situation? Or do you have an unusual plan and tax treatment?

The issue is whether you have a larger balance in RSU shares or not. For example, if you told us "I have $100K in RSU shares, with a long-term gain of $13K", this would be very different from telling us "I have $13K of shares I have held long-term, and the capital gain is a mere $1K". Can you help clear this up? It will impact how I view your urgency to sell this year.

Thanks!



Great question. Sorry I wasn't clear.

The value of the long ter shares is currently $13k (and I automatically paid taxes in shares when these vested in 2012). The capital gains on those RSU's is about $7k.

The RSU's that vested in in Jan. 2013 (also already paid income taxes on the vest) have a capital gain of $3k. So if the stock price were to remain unchanged and I sold today vs. next January I think it would be a difference of ~$500.

You guys are so awesome! Thanks for your help and clarifying questions.
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Re: Selling NQ Stock Options & Tax Brackets

Postby Wagnerjb » Tue May 14, 2013 2:13 pm

berg wrote:
dickenjb wrote:
NSO's - no way I would execute before year 5. After that I look at remaining time value as a fraction of Black & Scholes value - when it gets below about 20% I look to exercise & sell (cashless exercise).

As another poster has pointed out - it all gets taxed as ordinary income. Not ST cap gains. Not LT cap gains. Only ISO's qualify for cap gains treatment.


I'm confused, even at 20% of my net worth, you'd hold on to this for another 5 years assuming the market will go up? I feel like I'm missing something.


I agree with Dickenjb's advice, especially now that you tell us you are only 30 years old. My focus would be to sell the RSU's first, since they have no time value to them (like stock options do). When the RSU's are all cleared out if the stock options still represent a percentage of your net worth that makes you uncomfortable, just exercise enough of the oldest vintage such that you get your stock options-to-net worth ratio to an acceptable level. But at such a young age I would listen to people like Dickenjb and others here, who are saying that it is a sensible risk to let stock options run a bit longer.

Best wishes.
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Re: Selling NQ Stock Options & Tax Brackets

Postby Wagnerjb » Tue May 14, 2013 2:28 pm

berg wrote:The value of the long ter shares is currently $13k (and I automatically paid taxes in shares when these vested in 2012). The capital gains on those RSU's is about $7k.

The RSU's that vested in in Jan. 2013 (also already paid income taxes on the vest) have a capital gain of $3k. So if the stock price were to remain unchanged and I sold today vs. next January I think it would be a difference of ~$500.



Here is how I see your diversification today:

RSUs from 2012 $13K
RSUs from 2013 $12k
Stock options 1 $66k
Stock options 2 $30k
Other Assets $330k

Total $451

Your company exposure is 27% today.

You can generate $48K of income and stay in the 28% bracket. Sell the RSU's and generate $11k of income (realizing $3k is short term gains. You will pay $2k in tax on this. Then exercise another $37k of the oldest vintage of options (if you feel this is necessary) and pay 28% tax, amounting to 10k.

After paying the taxes, your net worth is now $439k and your company concentration is down to 13%. I suggest that amount is tolerable for a 30-year old. Just be sure to sell your RSU's immediately when they vest and watch your exposure in the stock options. If you are regularly awarded options and they accumulate - and your company stock skyrockets - you might find yourself in a true game-changing situation. For example, if your options were worth $2 million then I would clearly cash in your lottery and consider that you can retire much earlier than originally planned. But $60k of stock options won't change your life that much, so let them run a bit.

Hope this helps.
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Re: Selling NQ Stock Options & Tax Brackets

Postby berg » Tue May 14, 2013 3:01 pm

Wagnerjb wrote:
berg wrote:The value of the long ter shares is currently $13k (and I automatically paid taxes in shares when these vested in 2012). The capital gains on those RSU's is about $7k.

The RSU's that vested in in Jan. 2013 (also already paid income taxes on the vest) have a capital gain of $3k. So if the stock price were to remain unchanged and I sold today vs. next January I think it would be a difference of ~$500.



Here is how I see your diversification today:

RSUs from 2012 $13K
RSUs from 2013 $12k
Stock options 1 $66k
Stock options 2 $30k
Other Assets $330k

Total $451

Your company exposure is 27% today.

You can generate $48K of income and stay in the 28% bracket. Sell the RSU's and generate $11k of income (realizing $3k is short term gains. You will pay $2k in tax on this. Then exercise another $37k of the oldest vintage of options (if you feel this is necessary) and pay 28% tax, amounting to 10k.

After paying the taxes, your net worth is now $439k and your company concentration is down to 13%. I suggest that amount is tolerable for a 30-year old. Just be sure to sell your RSU's immediately when they vest and watch your exposure in the stock options. If you are regularly awarded options and they accumulate - and your company stock skyrockets - you might find yourself in a true game-changing situation. For example, if your options were worth $2 million then I would clearly cash in your lottery and consider that you can retire much earlier than originally planned. But $60k of stock options won't change your life that much, so let them run a bit.

Hope this helps.



I'm confused on the RSU's. I paid taxes (in the form of shares) on them when they vested. So wouldn't I only owe taxes on the gains ($7 long term, $3k short term). Wouldn't only the exercising of the options be considered additional income, plus the $3k of short term gain on the RSU's. So I'd have closer to $45k of options to exercise to stay under 28%. Maybe $40k to play it safe.
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Re: Selling NQ Stock Options & Tax Brackets

Postby Wagnerjb » Tue May 14, 2013 4:03 pm

berg wrote:I'm confused on the RSU's. I paid taxes (in the form of shares) on them when they vested. So wouldn't I only owe taxes on the gains ($7 long term, $3k short term). Wouldn't only the exercising of the options be considered additional income, plus the $3k of short term gain on the RSU's. So I'd have closer to $45k of options to exercise to stay under 28%. Maybe $40k to play it safe.


I suspect the $7k in LT capital gain will count towards reaching the 28% threshold. Even though it is taxed at 15%, it adds to your AGI and I believe it would push you over into the 33% bracket. I am not 100% positive on this, so I would run the numbers through TurboTax or calculate it by hand if I were you (to be positive).

Best wishes.
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Re: Selling NQ Stock Options & Tax Brackets

Postby dickenjb » Tue May 14, 2013 4:10 pm

Yes you only owe taxes on the appreciation of shares (which were RSU's) since they were awarded. Your mistake was not selling them the day they vested and buying TSM with the proceeds. Thus avoiding excessive concentration in employer stock and putting yourself into a diversified equity fund that you can hold for the next 30 years.

The deeper in the money NSO's are and closer they are to expiry, the closer it is to just owning company stock (bad).

The longer they have to run, and if the stock has only risen say 20% or 40% over strike price, the more leverage you have (good).

Exercising an option in the first 3 years right after vesting is usually wrong. Some people like to always exercise in the 10th year. Personally I like to exercise in year 7-8-9 if the time value is low relative to the sum of (time value + in-the-money-value). At that point you have very little leverage.

To each his own.
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Re: Selling NQ Stock Options & Tax Brackets

Postby dickenjb » Tue May 14, 2013 4:11 pm

Wagnerjb wrote:
I suspect the $7k in LT capital gain will count towards reaching the 28% threshold. Even though it is taxed at 15%, it adds to your AGI and I believe it would push you over into the 33% bracket. I am not 100% positive on this, so I would run the numbers through TurboTax or calculate it by hand if I were you (to be positive).

Best wishes.


No, I don't think this is true. LTCG sit "on top" of ordinary income and are taxed at only 15% unless you have really high income. (then 20% or 20% + 3.8% but never as ordinary income).
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Re: Selling NQ Stock Options & Tax Brackets

Postby lazyfabs » Tue May 14, 2013 5:26 pm

Are there any pros or cons in selling the all the restricted stock and taking the short term capital gains tax hit on the $3000 vs keeping the stock options longer and divesting closer to the expiration date?
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Re: Selling NQ Stock Options & Tax Brackets

Postby inbox788 » Tue May 14, 2013 8:37 pm

1) Sorry if it's covered ground, but aside from AMT mentioned, I didn't see these discussed. I'll repeat the caution of AMT territory.
2) When do the options expire? What is the strike price and current stock price? Or how far in the money is the option? The further in the money, the less valuable the option, but I'd hold on to it till the last day as much as practical (why give up free loan/money).
3) It may be helpful to know the company, but I understand if you don't wish to disclose. Maybe a sector or size or age (years public traded) might give insight as to how stable the company is. Or how much the stocks fluctuates in any given year.
4) Can you live without the RSU and options? If you can, I'd consider that play money until it's cashed out and take bigger risks with it, but that's me. You could take a bath or get a windfall.
5) Yes, spread out the gains so you keep lower tax bracket when you can. Make sure you're calculating correctly. If you can stay at the lower bracket, you'd save 5% in taxes on the difference, so on $50k that would be a $2,500 tax savings. It's May so waiting till January for some sales might make sense and you're taking a chance on the stock going up or down. Depends on whether you see us topping of now or the rally continuing. If we dip again this summer, there may be a new rally by January. Can you stand the rollercoaster? Also, back to taxes, the capital gains and income taxes are separate and only on the gains, not total sales. I assume you can sell partial lots or specific lots so that you can get higher or lower gains to make the numbers work.
6) If you want to get fancy, and you're worried about the stock falling, you could buy some insurance (buy a put or a collar), that is if your company is big enough for this to make sense.

http://www.theoptionsguide.com/the-collar-strategy.aspx
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Re: Selling NQ Stock Options & Tax Brackets

Postby tfb » Tue May 14, 2013 8:49 pm

dickenjb wrote:Your mistake was not selling them the day they vested and buying TSM with the proceeds. Thus avoiding excessive concentration in employer stock and putting yourself into a diversified equity fund that you can hold for the next 30 years.

In this case the OP got lucky in that the stock appreciated more than TSM. RSUs vested in 2012 worth $6k at the time grew to $13k. Another reason to sell now, although the stock can continue to outperform. Then again it can tank too.
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Re: Selling NQ Stock Options & Tax Brackets

Postby berg » Tue May 14, 2013 9:36 pm

inbox788 wrote:1) Sorry if it's covered ground, but aside from AMT mentioned, I didn't see these discussed. I'll repeat the caution of AMT territory.
2) When do the options expire? What is the strike price and current stock price? Or how far in the money is the option? The further in the money, the less valuable the option, but I'd hold on to it till the last day as much as practical (why give up free loan/money).
3) It may be helpful to know the company, but I understand if you don't wish to disclose. Maybe a sector or size or age (years public traded) might give insight as to how stable the company is. Or how much the stocks fluctuates in any given year.
4) Can you live without the RSU and options? If you can, I'd consider that play money until it's cashed out and take bigger risks with it, but that's me. You could take a bath or get a windfall.
5) Yes, spread out the gains so you keep lower tax bracket when you can. Make sure you're calculating correctly. If you can stay at the lower bracket, you'd save 5% in taxes on the difference, so on $50k that would be a $2,500 tax savings. It's May so waiting till January for some sales might make sense and you're taking a chance on the stock going up or down. Depends on whether you see us topping of now or the rally continuing. If we dip again this summer, there may be a new rally by January. Can you stand the rollercoaster? Also, back to taxes, the capital gains and income taxes are separate and only on the gains, not total sales. I assume you can sell partial lots or specific lots so that you can get higher or lower gains to make the numbers work.
6) If you want to get fancy, and you're worried about the stock falling, you could buy some insurance (buy a put or a collar), that is if your company is big enough for this to make sense.



1. Thanks.
2. I have option at a strike price ~$21 that expire in 2018 and ~$41 that expire in 2022. The current stock price is in the mid $50's.
3. The company is in the web sector, unfortunately it is hard to give many more details without making it pretty easy to figure out.
4. I can live without it. I max my 401k, do a backdoor roth, and still save. But this is a big % of net worth and conceivably could pay for my wife and I to do a nice home renovation (though no rush on that, ideally in the next 4-5 years as our family grows).
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Re: Selling NQ Stock Options & Tax Brackets

Postby hansp » Tue May 14, 2013 11:31 pm

berg,

I agree w/ everyone else to sell your RSUs ASAP. Count yourself lucky that they've outpaced the market so far.

Check out this thread for "grok's rule of thumb" for when to exercise options. I've found it very helpful. Note the "rule" definitely is on the conservative side as far as when to excercise & sell the options.

viewtopic.php?f=1&t=50963


Plugging in the numbers you provided above, I calculate that your 2022 options could be worth up to 50% of your portfolio before you'd want to exercise right now (because they still have so much time), whereas your 2018 options would only be about 2% of your total portfolio. However, even those still have 5 years on them. So one possibility is to sell most of the 2018 options and keep the 2018 around.

A good quote I've read several places (including around here) is that you should only exercise options early if it's "life changing" amount of $$. Given your reported income range, this looks like it would be a nice chunk of cash, but unlikely to be life changing. This would suggest holding both grants until it gets closer to the expiration.

In the end, you have to ask yourself, which is worse in your mind, selling now and finding out in 5-9 years that these would be worth 5-10X their value today or holding and them going to 0 when they expire. Only you can answer that for yourself.
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Re: Selling NQ Stock Options & Tax Brackets

Postby berg » Wed May 15, 2013 10:06 am

hansp wrote:berg,

I agree w/ everyone else to sell your RSUs ASAP. Count yourself lucky that they've outpaced the market so far.

Check out this thread for "grok's rule of thumb" for when to exercise options. I've found it very helpful. Note the "rule" definitely is on the conservative side as far as when to excercise & sell the options.

viewtopic.php?f=1&t=50963


Plugging in the numbers you provided above, I calculate that your 2022 options could be worth up to 50% of your portfolio before you'd want to exercise right now (because they still have so much time), whereas your 2018 options would only be about 2% of your total portfolio. However, even those still have 5 years on them. So one possibility is to sell most of the 2018 options and keep the 2018 around.

A good quote I've read several places (including around here) is that you should only exercise options early if it's "life changing" amount of $$. Given your reported income range, this looks like it would be a nice chunk of cash, but unlikely to be life changing. This would suggest holding both grants until it gets closer to the expiration.

In the end, you have to ask yourself, which is worse in your mind, selling now and finding out in 5-9 years that these would be worth 5-10X their value today or holding and them going to 0 when they expire. Only you can answer that for yourself.


Thanks, but when I use Grok's rule of them, I get 5% for the 2022 options, not 50%. Am I doing something wrong?

(0.83%*9) = 0.0747
(55/40) =1.375

0.0747/1.375 = 0.054 (or 5.4%)

I feel like I'm doing something wrong. Thanks all for the help!
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Re: Selling NQ Stock Options & Tax Brackets

Postby hansp » Wed May 15, 2013 10:50 am

You have to use the treasury rate that's equivalent to your time remaining. 10 yr treasuries are at 1.97% right now. I think I modified that down to ~1.8% to get to a 9 year estimate.

Also, the denominator is the ratio - 1 so in your example it is now 0.375 not 1.375
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Re: Selling NQ Stock Options & Tax Brackets

Postby grok87 » Thu May 16, 2013 11:39 pm

hansp wrote:You have to use the treasury rate that's equivalent to your time remaining. 10 yr treasuries are at 1.97% right now. I think I modified that down to ~1.8% to get to a 9 year estimate.

Also, the denominator is the ratio - 1 so in your example it is now 0.375 not 1.375

Agree. So the formula math is:

p = i*T / ( S/X -1)

1.8%*9/(55/40-1) = 43%. i.e. according to the formula you could hold an amount of the 2022 options equal to 43% of your net worth.
cheers,
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Re: Selling NQ Stock Options & Tax Brackets

Postby grok87 » Tue May 21, 2013 10:31 pm

berg wrote:
hansp wrote:berg,

I agree w/ everyone else to sell your RSUs ASAP. Count yourself lucky that they've outpaced the market so far.

Check out this thread for "grok's rule of thumb" for when to exercise options. I've found it very helpful. Note the "rule" definitely is on the conservative side as far as when to excercise & sell the options.

viewtopic.php?f=1&t=50963


Plugging in the numbers you provided above, I calculate that your 2022 options could be worth up to 50% of your portfolio before you'd want to exercise right now (because they still have so much time), whereas your 2018 options would only be about 2% of your total portfolio. However, even those still have 5 years on them. So one possibility is to sell most of the 2018 options and keep the 2018 around.

A good quote I've read several places (including around here) is that you should only exercise options early if it's "life changing" amount of $$. Given your reported income range, this looks like it would be a nice chunk of cash, but unlikely to be life changing. This would suggest holding both grants until it gets closer to the expiration.

In the end, you have to ask yourself, which is worse in your mind, selling now and finding out in 5-9 years that these would be worth 5-10X their value today or holding and them going to 0 when they expire. Only you can answer that for yourself.


Thanks, but when I use Grok's rule of them, I get 5% for the 2022 options, not 50%. Am I doing something wrong?

(0.83%*9) = 0.0747
(55/40) =1.375

0.0747/1.375 = 0.054 (or 5.4%)

I feel like I'm doing something wrong. Thanks all for the help!

see post above
grok, CFA | Danon delenda est
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