Incentive Stock Options, NSOS, and AMT

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MotoTrojan
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Incentive Stock Options, NSOS, and AMT

Post by MotoTrojan » Thu Apr 27, 2017 12:26 am

I am a few months away from the start of my vesting of options for a non publicly traded company, and want to get a good head start on the tax-implications prior to making any decisions. Up to $100K/year in fair-market-value is granted as an Incentive Stock Option (ISO) and anything over that becomes a Nonstatutory Stock Option.

I also have some RSU's from a previous company which I will likely be selling while exercising the above options. First question, it is my understanding that selling these RSU's won't directly trigger AMT, as the value when vested as already charged as income tax, and only gains (all held longterm) will be taxed just like any other equity sale. Correct?

As to the options, if exercised without a spread (strike = market-value), there will be NO tax owed, assuming total strike-price/year is under $100K, correct? I simply pay the strike price and then enjoy paying 15% capital gains when I sell in XX years.

If exercised after market-value has gone up over my exercise/strike price, up to $100K/year, that delta will be counted as AMT, but no income tax on that value. When sold, the only taxes paid would be gains (long-term lets say) on the difference between sale price and exercise price. How is this not double-dipping on taxes? Seems the initial spread is taxed twice, via AMT, and a portion of the gains tax.

If amount exercised in a year exceeds $100K, the previous paragraph counts up to $100K, and remaining would be treated as regular income, and then gains above fair-market value at time of exercise are taxed like normal equities, correct?

Anything I am missing? Anything I can do to help reduce my tax burden?

Lastly, the way this link describes the $100K/year limit for ISO, is that it is on the exercise price (strike price), but my option-grant is written as though it is a $100K/year limit on fair-market value, not exercise price. Which one is correct per normal tax-law? Still early enough to push for a revision of the option-grant paperwork, assuming the second interpretation is wrong. This will become an issue as the current strike price will never exceed $100K/year, but as fair-market value goes up it'll have the potential to far exceed it, pushing many shares into NSOS territory.

http://www.calcorporatecounsel.com/2011 ... ions-nsos/

toast0
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Re: Incentive Stock Options, NSOS, and AMT

Post by toast0 » Thu Apr 27, 2017 1:46 am

Selling RSUs shouldn't trigger AMT per se, but it may by virtue of raising state income tax, and therefore the state income tax deduction which isn't allowed under AMT.

My understanding is that the IRS limit for ISO vesting is on the exercise price, not the fair market price at time of vesting (although, those could be the same if the value hasn't changed during that time). If the strike price is the same as the fair market value, then there's no tax owed and you've started the holding period, for ISO and NSO. If there is a spread, exercising an NSO realizes ordinary income on the spread and your cost basis is the market value, exercising an ISO realizes AMT income and the AMT basis is the market value, but income for normal tax isn't realized until you sell; if you have a qualifying disposition, standard cost basis will be the exercise price, a disqualifying disposition will result in ordinary income of the spread, but your cost basis will be the market value. There's a credit available in future years to offset the AMT, but I don't know the details, you'll probably have to wade through the form 6251 (AMT) instructions to figure it out, the articles i found were fairly vague.

One thing to note, especially if you were able to exercise before a year after the grant, you must hold the stock for 2 years from the date of the grant and one year from the date of exercise in order to get LTCG; if you were able to exercise at 6 months and sold 13 months after exercise (possibly due to a sale of the company), you would pay ordinary income on the spread, and long term capital gains on the difference between your sales price and the market value on the day of exercise.

TedSwippet
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Re: Incentive Stock Options, NSOS, and AMT

Post by TedSwippet » Thu Apr 27, 2017 3:53 am

toast0 wrote:One thing to note, especially if you were able to exercise before a year after the grant, you must hold the stock for 2 years from the date of the grant and one year from the date of exercise in order to get LTCG; if you were able to exercise at 6 months and sold 13 months after exercise (possibly due to a sale of the company), you would pay ordinary income on the spread, and long term capital gains on the difference between your sales price and the market value on the day of exercise.
...and in case you don't see the potential tax trap in this, I'll spell it out.

If the stock's price declines in the 13 months that you hold it, you are still liable for income tax on the spread between grant and exercise price. With a sizeable price decline after exercise -- of the type seen in 2000 and 2008, for example -- the income tax bill can be larger than the remaining value of the stock held. You can claim a capital loss on the difference between sales price and exercise market value, but this may not make up for the income tax paid unless taken as $3k/year against income tax. It may also take years or decades to recover.

Ordinarily one might consider a 'stop-loss' here and sell when the value of the stock drops towards your tax liability, but black-out periods and other restrictions on "insider" trading often conspire to make this impractical.

Note that this trap only applies to ISOs (and ESPPs, by extension). NSOs and RSUs don't suffer from it.

Topic Author
MotoTrojan
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Re: Incentive Stock Options, NSOS, and AMT

Post by MotoTrojan » Thu Apr 27, 2017 9:39 am

TedSwippet wrote:
toast0 wrote:One thing to note, especially if you were able to exercise before a year after the grant, you must hold the stock for 2 years from the date of the grant and one year from the date of exercise in order to get LTCG; if you were able to exercise at 6 months and sold 13 months after exercise (possibly due to a sale of the company), you would pay ordinary income on the spread, and long term capital gains on the difference between your sales price and the market value on the day of exercise.
...and in case you don't see the potential tax trap in this, I'll spell it out.

If the stock's price declines in the 13 months that you hold it, you are still liable for income tax on the spread between grant and exercise price. With a sizeable price decline after exercise -- of the type seen in 2000 and 2008, for example -- the income tax bill can be larger than the remaining value of the stock held. You can claim a capital loss on the difference between sales price and exercise market value, but this may not make up for the income tax paid unless taken as $3k/year against income tax. It may also take years or decades to recover.

Ordinarily one might consider a 'stop-loss' here and sell when the value of the stock drops towards your tax liability, but black-out periods and other restrictions on "insider" trading often conspire to make this impractical.

Note that this trap only applies to ISOs (and ESPPs, by extension). NSOs and RSUs don't suffer from it.
What is the advantage to an ISO? I have been told it is advantageous but am struggling to see much tax difference. Just that, after AMT credit, the entire spread (and any gains after exercise) are only taxed as LTCG?

TedSwippet
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Re: Incentive Stock Options, NSOS, and AMT

Post by TedSwippet » Thu Apr 27, 2017 10:44 am

MotoTrojan wrote:What is the advantage to an ISO? I have been told it is advantageous but am struggling to see much tax difference. Just that, after AMT credit, the entire spread (and any gains after exercise) are only taxed as LTCG?
The most reliable source of stock options information is probably Fairmark. Some reading around this site should clarify several of your choices here. Or at minimum, give you a framework in which to place things.

Topic Author
MotoTrojan
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Re: Incentive Stock Options, NSOS, and AMT

Post by MotoTrojan » Thu Apr 27, 2017 11:33 am

TedSwippet wrote:
MotoTrojan wrote:What is the advantage to an ISO? I have been told it is advantageous but am struggling to see much tax difference. Just that, after AMT credit, the entire spread (and any gains after exercise) are only taxed as LTCG?
The most reliable source of stock options information is probably Fairmark. Some reading around this site should clarify several of your choices here. Or at minimum, give you a framework in which to place things.
Thank you! Looks like an excellent resource.

After talking to some colleagues (low double digit start-up, I was 3rd hire) I think discussing things with a professional may be warranted. What type of person would I be looking for? What type of cost structure would that entail? I am fairly self-sufficient in researching these types of things once a base plan is laid out, but a 1-2 hour chat with someone would make me feel a lot better moving forward. With the added complexity I may also consider moving from TurboTax to using a professional tax adviser, so I could dangle that offer to try and get a better deal on the intro/advice session.

HornedToad
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Re: Incentive Stock Options, NSOS, and AMT

Post by HornedToad » Thu Apr 27, 2017 12:02 pm

MotoTrojan wrote:
TedSwippet wrote:
MotoTrojan wrote:What is the advantage to an ISO? I have been told it is advantageous but am struggling to see much tax difference. Just that, after AMT credit, the entire spread (and any gains after exercise) are only taxed as LTCG?
The most reliable source of stock options information is probably Fairmark. Some reading around this site should clarify several of your choices here. Or at minimum, give you a framework in which to place things.
Thank you! Looks like an excellent resource.

After talking to some colleagues (low double digit start-up, I was 3rd hire) I think discussing things with a professional may be warranted. What type of person would I be looking for? What type of cost structure would that entail? I am fairly self-sufficient in researching these types of things once a base plan is laid out, but a 1-2 hour chat with someone would make me feel a lot better moving forward. With the added complexity I may also consider moving from TurboTax to using a professional tax adviser, so I could dangle that offer to try and get a better deal on the intro/advice session.
Wealthfront has a good series of blog posts on stock options: https://blog.wealthfront.com/category/s ... pensation/

Including talking about why always to file your 83(b) options if you are an early hire in a startup: https://blog.wealthfront.com/always-file-your-83b/

Topic Author
MotoTrojan
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Re: Incentive Stock Options, NSOS, and AMT

Post by MotoTrojan » Thu Apr 27, 2017 12:11 pm

HornedToad wrote:
MotoTrojan wrote:
TedSwippet wrote:
MotoTrojan wrote:What is the advantage to an ISO? I have been told it is advantageous but am struggling to see much tax difference. Just that, after AMT credit, the entire spread (and any gains after exercise) are only taxed as LTCG?
The most reliable source of stock options information is probably Fairmark. Some reading around this site should clarify several of your choices here. Or at minimum, give you a framework in which to place things.
Thank you! Looks like an excellent resource.

After talking to some colleagues (low double digit start-up, I was 3rd hire) I think discussing things with a professional may be warranted. What type of person would I be looking for? What type of cost structure would that entail? I am fairly self-sufficient in researching these types of things once a base plan is laid out, but a 1-2 hour chat with someone would make me feel a lot better moving forward. With the added complexity I may also consider moving from TurboTax to using a professional tax adviser, so I could dangle that offer to try and get a better deal on the intro/advice session.
Wealthfront has a good series of blog posts on stock options: https://blog.wealthfront.com/category/s ... pensation/

Including talking about why always to file your 83(b) options if you are an early hire in a startup: https://blog.wealthfront.com/always-file-your-83b/
Thanks. 83b is also something I've heard of and want to delve more into. I've heard there are risks/drawbacks, but need clarification. Guess it could be as simple as risking the full strike cost from day 1.

HornedToad
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Joined: Wed May 21, 2008 12:36 am

Re: Incentive Stock Options, NSOS, and AMT

Post by HornedToad » Thu Apr 27, 2017 12:17 pm

MotoTrojan wrote:
HornedToad wrote:
MotoTrojan wrote:
TedSwippet wrote:
MotoTrojan wrote:What is the advantage to an ISO? I have been told it is advantageous but am struggling to see much tax difference. Just that, after AMT credit, the entire spread (and any gains after exercise) are only taxed as LTCG?
The most reliable source of stock options information is probably Fairmark. Some reading around this site should clarify several of your choices here. Or at minimum, give you a framework in which to place things.
Thank you! Looks like an excellent resource.

After talking to some colleagues (low double digit start-up, I was 3rd hire) I think discussing things with a professional may be warranted. What type of person would I be looking for? What type of cost structure would that entail? I am fairly self-sufficient in researching these types of things once a base plan is laid out, but a 1-2 hour chat with someone would make me feel a lot better moving forward. With the added complexity I may also consider moving from TurboTax to using a professional tax adviser, so I could dangle that offer to try and get a better deal on the intro/advice session.
Wealthfront has a good series of blog posts on stock options: https://blog.wealthfront.com/category/s ... pensation/

Including talking about why always to file your 83(b) options if you are an early hire in a startup: https://blog.wealthfront.com/always-file-your-83b/
Thanks. 83b is also something I've heard of and want to delve more into. I've heard there are risks/drawbacks, but need clarification. Guess it could be as simple as risking the full strike cost from day 1.
It depends on your strike price. If you are one of the first employees and your strike price is pennies then you can buy all your options for a negligible amount and have pure upside. If your strike price is material then there are serious drawbacks to consider. Anyway, take a look at the series of blog posts and see if it helps. I've used them before when considering options/RSUs and have at least made me think about it.

Topic Author
MotoTrojan
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Re: Incentive Stock Options, NSOS, and AMT

Post by MotoTrojan » Thu Apr 27, 2017 1:53 pm

HornedToad wrote:
MotoTrojan wrote:
HornedToad wrote:
MotoTrojan wrote:
TedSwippet wrote: The most reliable source of stock options information is probably Fairmark. Some reading around this site should clarify several of your choices here. Or at minimum, give you a framework in which to place things.
Thank you! Looks like an excellent resource.

After talking to some colleagues (low double digit start-up, I was 3rd hire) I think discussing things with a professional may be warranted. What type of person would I be looking for? What type of cost structure would that entail? I am fairly self-sufficient in researching these types of things once a base plan is laid out, but a 1-2 hour chat with someone would make me feel a lot better moving forward. With the added complexity I may also consider moving from TurboTax to using a professional tax adviser, so I could dangle that offer to try and get a better deal on the intro/advice session.
Wealthfront has a good series of blog posts on stock options: https://blog.wealthfront.com/category/s ... pensation/

Including talking about why always to file your 83(b) options if you are an early hire in a startup: https://blog.wealthfront.com/always-file-your-83b/
Thanks. 83b is also something I've heard of and want to delve more into. I've heard there are risks/drawbacks, but need clarification. Guess it could be as simple as risking the full strike cost from day 1.
It depends on your strike price. If you are one of the first employees and your strike price is pennies then you can buy all your options for a negligible amount and have pure upside. If your strike price is material then there are serious drawbacks to consider. Anyway, take a look at the series of blog posts and see if it helps. I've used them before when considering options/RSUs and have at least made me think about it.
Thanks. It's negligible compared to potential (risky) upside, but is still in the realm of my total annual investment amount. Also it's a ladder based vest, so it's 10X what my first year strike would be (currently expect price increase after I've vested ~20%). Risk vs. Reward :).

toast0
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Location: San Francisco Bay Area

Re: Incentive Stock Options, NSOS, and AMT

Post by toast0 » Thu Apr 27, 2017 11:05 pm

MotoTrojan wrote:What is the advantage to an ISO? I have been told it is advantageous but am struggling to see much tax difference. Just that, after AMT credit, the entire spread (and any gains after exercise) are only taxed as LTCG?
As one example of a nice outcome: I was able to early exercise some ISO options (and file an 83b) when the strike price was the same as the market price, and the company was later purchased for significantly more per share -- my cost basis in those shares is the original strike price, and all the gains are LTCG; if they were NSOs, I wouldn't be able to early exercise with an 83b, and would likely not have exercised shares as they vested since I would have to pay the strike price to the company and tax on the spread to the government in order to hold an illiquid asset, so I would be paying ordinary income on the gains.

If you can figure out how to get some amount of the company stock into a Roth account, that would be really great, if your company ends up with a nice exit. Even a traditional retirement account would be useful for some portion, because the sale of the company (or sale of acquirer stock, if it's structured as a stock swap) wouldn't incur taxes. Then you could diversify right away, but defer taxes.

Topic Author
MotoTrojan
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Re: Incentive Stock Options, NSOS, and AMT

Post by MotoTrojan » Thu Apr 27, 2017 11:50 pm

toast0 wrote:
MotoTrojan wrote:What is the advantage to an ISO? I have been told it is advantageous but am struggling to see much tax difference. Just that, after AMT credit, the entire spread (and any gains after exercise) are only taxed as LTCG?
As one example of a nice outcome: I was able to early exercise some ISO options (and file an 83b) when the strike price was the same as the market price, and the company was later purchased for significantly more per share -- my cost basis in those shares is the original strike price, and all the gains are LTCG; if they were NSOs, I wouldn't be able to early exercise with an 83b, and would likely not have exercised shares as they vested since I would have to pay the strike price to the company and tax on the spread to the government in order to hold an illiquid asset, so I would be paying ordinary income on the gains.

If you can figure out how to get some amount of the company stock into a Roth account, that would be really great, if your company ends up with a nice exit. Even a traditional retirement account would be useful for some portion, because the sale of the company (or sale of acquirer stock, if it's structured as a stock swap) wouldn't incur taxes. Then you could diversify right away, but defer taxes.
Very cool. When the time comes (prior to new valuation) I'll see how things stand and decide if 83b is worth the risk. I don't think I'd risk my Roth space though; if things pan out I'll have "won the game" by ~30 years old, so I don't want to put EVERY egg in one basket.

deanmoriarty
Posts: 242
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Re: Incentive Stock Options, NSOS, and AMT

Post by deanmoriarty » Sun Apr 14, 2019 9:16 pm

TedSwippet wrote:
Thu Apr 27, 2017 3:53 am
toast0 wrote:One thing to note, especially if you were able to exercise before a year after the grant, you must hold the stock for 2 years from the date of the grant and one year from the date of exercise in order to get LTCG; if you were able to exercise at 6 months and sold 13 months after exercise (possibly due to a sale of the company), you would pay ordinary income on the spread, and long term capital gains on the difference between your sales price and the market value on the day of exercise.
...and in case you don't see the potential tax trap in this, I'll spell it out.

If the stock's price declines in the 13 months that you hold it, you are still liable for income tax on the spread between grant and exercise price. With a sizeable price decline after exercise -- of the type seen in 2000 and 2008, for example -- the income tax bill can be larger than the remaining value of the stock held. You can claim a capital loss on the difference between sales price and exercise market value, but this may not make up for the income tax paid unless taken as $3k/year against income tax. It may also take years or decades to recover.

Ordinarily one might consider a 'stop-loss' here and sell when the value of the stock drops towards your tax liability, but black-out periods and other restrictions on "insider" trading often conspire to make this impractical.

Note that this trap only applies to ISOs (and ESPPs, by extension). NSOs and RSUs don't suffer from it.
I know this is a very old thread, but I was wondering if you could shed some light on how you can end up owing significant taxes even if the exercised shares go well below the market value at the time of exercise (including $0).

In particular, the scenario I’m talking about would match the third example listed at https://turbotax.intuit.com/tax-tips/in ... /L4azWgfwy. The example clearly states how the income tax would be owed on the actual gain (or loss) rather than the bargaining element (quote: “In this example, the amount that is considered compensation is limited to $1,000, your actual gain when you sell the shares, even though your bargain element ($2,500) is higher”).

Are you suggesting that the website is wrong, or that I misunderstood your example?

Of course, I’m not talking about AMT, which one would have to pay anyway if the shares are not disposed by the end of the calendar year.

I would be very grateful for a response on this.

Thanks

Topic Author
MotoTrojan
Posts: 3801
Joined: Wed Feb 01, 2017 8:39 pm

Re: Incentive Stock Options, NSOS, and AMT

Post by MotoTrojan » Sun Apr 14, 2019 10:28 pm

deanmoriarty wrote:
Sun Apr 14, 2019 9:16 pm
TedSwippet wrote:
Thu Apr 27, 2017 3:53 am
toast0 wrote:One thing to note, especially if you were able to exercise before a year after the grant, you must hold the stock for 2 years from the date of the grant and one year from the date of exercise in order to get LTCG; if you were able to exercise at 6 months and sold 13 months after exercise (possibly due to a sale of the company), you would pay ordinary income on the spread, and long term capital gains on the difference between your sales price and the market value on the day of exercise.
...and in case you don't see the potential tax trap in this, I'll spell it out.

If the stock's price declines in the 13 months that you hold it, you are still liable for income tax on the spread between grant and exercise price. With a sizeable price decline after exercise -- of the type seen in 2000 and 2008, for example -- the income tax bill can be larger than the remaining value of the stock held. You can claim a capital loss on the difference between sales price and exercise market value, but this may not make up for the income tax paid unless taken as $3k/year against income tax. It may also take years or decades to recover.

Ordinarily one might consider a 'stop-loss' here and sell when the value of the stock drops towards your tax liability, but black-out periods and other restrictions on "insider" trading often conspire to make this impractical.

Note that this trap only applies to ISOs (and ESPPs, by extension). NSOs and RSUs don't suffer from it.
I know this is a very old thread, but I was wondering if you could shed some light on how you can end up owing significant taxes even if the exercised shares go well below the market value at the time of exercise (including $0).

In particular, the scenario I’m talking about would match the third example listed at https://turbotax.intuit.com/tax-tips/in ... /L4azWgfwy. The example clearly states how the income tax would be owed on the actual gain (or loss) rather than the bargaining element (quote: “In this example, the amount that is considered compensation is limited to $1,000, your actual gain when you sell the shares, even though your bargain element ($2,500) is higher”).

Are you suggesting that the website is wrong, or that I misunderstood your example?

Of course, I’m not talking about AMT, which one would have to pay anyway if the shares are not disposed by the end of the calendar year.

I would be very grateful for a response on this.

Thanks
Pretty sure the entire post revolves around AMT.

deanmoriarty
Posts: 242
Joined: Tue Jan 28, 2014 1:19 am

Re: Incentive Stock Options, NSOS, and AMT

Post by deanmoriarty » Sun Apr 14, 2019 10:32 pm

MotoTrojan wrote:
Sun Apr 14, 2019 10:28 pm
deanmoriarty wrote:
Sun Apr 14, 2019 9:16 pm
TedSwippet wrote:
Thu Apr 27, 2017 3:53 am
toast0 wrote:One thing to note, especially if you were able to exercise before a year after the grant, you must hold the stock for 2 years from the date of the grant and one year from the date of exercise in order to get LTCG; if you were able to exercise at 6 months and sold 13 months after exercise (possibly due to a sale of the company), you would pay ordinary income on the spread, and long term capital gains on the difference between your sales price and the market value on the day of exercise.
...and in case you don't see the potential tax trap in this, I'll spell it out.

If the stock's price declines in the 13 months that you hold it, you are still liable for income tax on the spread between grant and exercise price. With a sizeable price decline after exercise -- of the type seen in 2000 and 2008, for example -- the income tax bill can be larger than the remaining value of the stock held. You can claim a capital loss on the difference between sales price and exercise market value, but this may not make up for the income tax paid unless taken as $3k/year against income tax. It may also take years or decades to recover.

Ordinarily one might consider a 'stop-loss' here and sell when the value of the stock drops towards your tax liability, but black-out periods and other restrictions on "insider" trading often conspire to make this impractical.

Note that this trap only applies to ISOs (and ESPPs, by extension). NSOs and RSUs don't suffer from it.
I know this is a very old thread, but I was wondering if you could shed some light on how you can end up owing significant taxes even if the exercised shares go well below the market value at the time of exercise (including $0).

In particular, the scenario I’m talking about would match the third example listed at https://turbotax.intuit.com/tax-tips/in ... /L4azWgfwy. The example clearly states how the income tax would be owed on the actual gain (or loss) rather than the bargaining element (quote: “In this example, the amount that is considered compensation is limited to $1,000, your actual gain when you sell the shares, even though your bargain element ($2,500) is higher”).

Are you suggesting that the website is wrong, or that I misunderstood your example?

Of course, I’m not talking about AMT, which one would have to pay anyway if the shares are not disposed by the end of the calendar year.

I would be very grateful for a response on this.

Thanks
Pretty sure the entire post revolves around AMT.
I thought so too, but the fact that the commenter talked a lot about “income tax”, “capital loss”, “$3k/y” rather than “AMT” and “AMT tax credit” made me think that he/she believed there was another way to get screwed from a regular tax point of view, if the share price diminishes, but I can’t find any reference on the web that refers to this case (when we talk about ISO).

Topic Author
MotoTrojan
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Joined: Wed Feb 01, 2017 8:39 pm

Re: Incentive Stock Options, NSOS, and AMT

Post by MotoTrojan » Sun Apr 14, 2019 11:36 pm

deanmoriarty wrote:
Sun Apr 14, 2019 10:32 pm
MotoTrojan wrote:
Sun Apr 14, 2019 10:28 pm
deanmoriarty wrote:
Sun Apr 14, 2019 9:16 pm
TedSwippet wrote:
Thu Apr 27, 2017 3:53 am
toast0 wrote:One thing to note, especially if you were able to exercise before a year after the grant, you must hold the stock for 2 years from the date of the grant and one year from the date of exercise in order to get LTCG; if you were able to exercise at 6 months and sold 13 months after exercise (possibly due to a sale of the company), you would pay ordinary income on the spread, and long term capital gains on the difference between your sales price and the market value on the day of exercise.
...and in case you don't see the potential tax trap in this, I'll spell it out.

If the stock's price declines in the 13 months that you hold it, you are still liable for income tax on the spread between grant and exercise price. With a sizeable price decline after exercise -- of the type seen in 2000 and 2008, for example -- the income tax bill can be larger than the remaining value of the stock held. You can claim a capital loss on the difference between sales price and exercise market value, but this may not make up for the income tax paid unless taken as $3k/year against income tax. It may also take years or decades to recover.

Ordinarily one might consider a 'stop-loss' here and sell when the value of the stock drops towards your tax liability, but black-out periods and other restrictions on "insider" trading often conspire to make this impractical.

Note that this trap only applies to ISOs (and ESPPs, by extension). NSOs and RSUs don't suffer from it.
I know this is a very old thread, but I was wondering if you could shed some light on how you can end up owing significant taxes even if the exercised shares go well below the market value at the time of exercise (including $0).

In particular, the scenario I’m talking about would match the third example listed at https://turbotax.intuit.com/tax-tips/in ... /L4azWgfwy. The example clearly states how the income tax would be owed on the actual gain (or loss) rather than the bargaining element (quote: “In this example, the amount that is considered compensation is limited to $1,000, your actual gain when you sell the shares, even though your bargain element ($2,500) is higher”).

Are you suggesting that the website is wrong, or that I misunderstood your example?

Of course, I’m not talking about AMT, which one would have to pay anyway if the shares are not disposed by the end of the calendar year.

I would be very grateful for a response on this.

Thanks
Pretty sure the entire post revolves around AMT.
I thought so too, but the fact that the commenter talked a lot about “income tax”, “capital loss”, “$3k/y” rather than “AMT” and “AMT tax credit” made me think that he/she believed there was another way to get screwed from a regular tax point of view, if the share price diminishes, but I can’t find any reference on the web that refers to this case (when we talk about ISO).
It’s my understanding the only non-AMT paid on ISOs is the cap gain when sold.

deanmoriarty
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Joined: Tue Jan 28, 2014 1:19 am

Re: Incentive Stock Options, NSOS, and AMT

Post by deanmoriarty » Mon Apr 15, 2019 11:01 am

MotoTrojan wrote:
Sun Apr 14, 2019 11:36 pm
It’s my understanding the only non-AMT paid on ISOs is the cap gain when sold.
More precisely, it should be all capital gain (long term) if the disposition is qualified. If it's not qualified, it should be compensation income up until the bargain element (FMV at exercise time), with any exceeding amount (profits above FMV at exercise time) being capital gain (short or long depending on the holding period).

I still have no idea what the poster meant with:
Ordinarily one might consider a 'stop-loss' here and sell when the value of the stock drops towards your tax liability
I might reach out to them via PM and ask them to kindly comment on this old thread to clarify what they meant, if they were specifically talking about AMT or if they were aware of some extra traps. I read the entire FairMark and really can't find any "ISO trap" besides the obvious AMT.

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