When should I exercise my incentive stock options?

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Topic Author
beachball
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When should I exercise my incentive stock options?

Post by beachball » Tue Jul 04, 2017 1:59 am

The company I work for went public some time ago. My options just vested but are still restricted. The options are about $60K in the money right now. The stock price has fluctuated since the IPO. Its hard to say whether it will go up or down as is the case for all stocks.

If I were to exercise the options right now, my holding period will begin and I will be able to sell the (then unrestricted) stock a year from now with long term capital gains instead of short term. As long term is 15% and short is 30%, assuming that the gains stay at 60K, that's a tax saving of $9K. This saving could be even higher if the stock price goes up further. However, exercising now will put me in the AMT range and I will have to immediately pay an extra $20K in tax right now.

There is always the risk of a stock price collapse and then I'll lose the 20K tax along with the principal I put up to exercise the options.

Does it make sense for me to exercise right now?

Topic Author
beachball
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Re: When should I exercise my incentive stock options?

Post by beachball » Tue Jul 04, 2017 11:13 am

Also, do I need to pay the tax immediately or at the end of the year as usual?

Topic Author
beachball
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Re: When should I exercise my incentive stock options?

Post by beachball » Thu Jul 06, 2017 5:28 pm

Another question: Does form 83(b) come into play with incentive stock options?

MotoTrojan
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Re: When should I exercise my incentive stock options?

Post by MotoTrojan » Thu Jul 06, 2017 5:37 pm

beachball wrote:Another question: Does form 83(b) come into play with incentive stock options?
I believe so, but the 30 day limit from date of grant may keep this option off the table.

Subscribing since I'm about to start vesting ISO's in a small, venture funded company. Low/mid 5-figure strike, with an upper 7-figure estimated value, should we be successful enough for shares to become liquid (even privately).

I'm very nervous about AMT implications, consider it could be a very risky, if even possible, tax hit to exercise options as our valuation climbs.

lowndes
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Re: When should I exercise my incentive stock options?

Post by lowndes » Thu Jul 06, 2017 5:47 pm

beachball wrote:The company I work for went public some time ago. My options just vested but are still restricted. The options are about $60K in the money right now. The stock price has fluctuated since the IPO. Its hard to say whether it will go up or down as is the case for all stocks.

If I were to exercise the options right now, my holding period will begin and I will be able to sell the (then unrestricted) stock a year from now with long term capital gains instead of short term. As long term is 15% and short is 30%, assuming that the gains stay at 60K, that's a tax saving of $9K. This saving could be even higher if the stock price goes up further. However, exercising now will put me in the AMT range and I will have to immediately pay an extra $20K in tax right now.

There is always the risk of a stock price collapse and then I'll lose the 20K tax along with the principal I put up to exercise the options.

Does it make sense for me to exercise right now?
Were the options not registered on Form S-8 when your company went public? I would not think your options would be restricted securities or subject to a holding period upon exercise.

Topic Author
beachball
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Re: When should I exercise my incentive stock options?

Post by beachball » Thu Jul 06, 2017 8:35 pm

There is a lockup clause that prevents those options or the shares obtained through exercise from being sold for a period of 6 months after the IPO. This is fairly standard in the industry.

lowndes
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Re: When should I exercise my incentive stock options?

Post by lowndes » Thu Jul 06, 2017 8:45 pm

beachball wrote:There is a lockup clause that prevents those options or the shares obtained through exercise from being sold for a period of 6 months after the IPO. This is fairly standard in the industry.
Yes, it's fairly standard for management, selling stockholders, directors and major shareholders. It's a bit unusual for the underwriters to require employees who aren't selling in the offering to sign a lockup. Also, if your company went public awhile ago shouldn't that lockup almost be expired?

It sounds like the holding period you mentioned is a requirement of Rule 144. That requirement wouldn't apply if the securities were registered on Form S-8 at time of IPO (in essence those securities are now registered securities and you no longer need to rely on an exemption such as Rule 144). Do you know if they have been registered on an S-8?

huntertheory
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Re: When should I exercise my incentive stock options?

Post by huntertheory » Thu Jul 06, 2017 9:00 pm

lowndes wrote:
beachball wrote:There is a lockup clause that prevents those options or the shares obtained through exercise from being sold for a period of 6 months after the IPO. This is fairly standard in the industry.
Yes, it's fairly standard for management, selling stockholders, directors and major shareholders. It's a bit unusual for the underwriters to require employees who aren't selling in the offering to sign a lockup. Also, if your company went public awhile ago shouldn't that lockup almost be expired?
This is incorrect. Essentially every underwriter -- from the big bulge bracket banks to smaller boutique banks who specialize in certain industries -- require the Company to seek lockups from every single equityholder in the Company. Exceptions are sometimes made for small stockholders who simply cannot be found prior to pricing. There is a timing element, where only people "under the tent" will sign lockups before the first confidential submission of a draft registration statement, but after the public filing of the S-1 (i.e., when the world knows the Company is going public) the Company is required as a matter of practice and as a condition to the underwriting agreement (more or less -- the specific wording gets negotiated) to obtain lockups from all equity holders, including optionholders. Now, sometimes with Companies with a huge volume of optionholders complain and obtain an accommodation from the underwriters to seek these lockups post-closing, but again that means the Company contractually agrees to obtain a lockup from every optionholder post-IPO.

And, further, the point is often moot because many pre-IPO companies have a post-IPO 180 day lockup built right into the equity plan and option agreements the employee signs when they are granted the options. So I don't know where the idea that a lockup for essentially all equityholders is "unusual."
It sounds like the holding period you mentioned is a requirement of Rule 144. That requirement wouldn't apply if the securities were registered on Form S-8 at time of IPO (in essence those securities are now registered securities and you no longer need to rely on an exemption such as Rule 144). Do you know if they have been registered on an S-8?
This is garbled, but the punchline is that the pre-IPO grants were likely made under Rule 701 and Rule 701 specifically references the 144 holding periods (which, keep in mind, begin running from the time one acquires the security), but 701 also goes on to say that if the subject Company has its securities listed on an exchange and becomes subject to the reporting requirements of the Exchange Act (i.e., goes public), then the securities obtained in exchange for/as a result of exercise of equity awards made under Rule 701 (i.e., pre-IPO) become freely tradeable after 90 days. In other words, the original poster is correct that the IPO lockup governs. I don't know what kind of time period he's subject to, however, and most IPO lockups specifically carve-out exercises of options (including net exercises where some shares are sold to cover taxes, although not for certain executives and directors where it would trigger a public filing under Section 16 of the Exchange Act -- but it doesn't sound like the OP is that kind of executive officer.)

(None of the above is legal advice.)

lowndes
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Re: When should I exercise my incentive stock options?

Post by lowndes » Thu Jul 06, 2017 9:09 pm

huntertheory wrote:
lowndes wrote:
beachball wrote:There is a lockup clause that prevents those options or the shares obtained through exercise from being sold for a period of 6 months after the IPO. This is fairly standard in the industry.
Yes, it's fairly standard for management, selling stockholders, directors and major shareholders. It's a bit unusual for the underwriters to require employees who aren't selling in the offering to sign a lockup. Also, if your company went public awhile ago shouldn't that lockup almost be expired?
This is incorrect. Essentially every underwriter -- from the big bulge bracket banks to smaller boutique banks who specialize in certain industries -- require the Company to seek lockups from every single equityholder in the Company. Exceptions are sometimes made for small stockholders who simply cannot be found prior to pricing. There is a timing element, where only people "under the tent" will sign lockups before the first confidential submission of a draft registration statement, but after the public filing of the S-1 (i.e., when the world knows the Company is going public) the Company is required as a matter of practice and as a condition to the underwriting agreement (more or less -- the specific wording gets negotiated) to obtain lockups from all equity holders, including optionholders. Now, sometimes with Companies with a huge volume of optionholders complain and obtain an accommodation from the underwriters to seek these lockups post-closing, but again that means the Company contractually agrees to obtain a lockup from every optionholder post-IPO.

And, further, the point is often moot because many pre-IPO companies have a post-IPO 180 day lockup built right into the equity plan and option agreements the employee signs when they are granted the options. So I don't know where the idea that a lockup for essentially all equityholders is "unusual."
It sounds like the holding period you mentioned is a requirement of Rule 144. That requirement wouldn't apply if the securities were registered on Form S-8 at time of IPO (in essence those securities are now registered securities and you no longer need to rely on an exemption such as Rule 144). Do you know if they have been registered on an S-8?
This is garbled, but the punchline is that the pre-IPO grants were likely made under Rule 701 and Rule 701 specifically references the 144 holding periods (which, keep in mind, begin running from the time one acquires the security), but 701 also goes on to say that if the subject Company has its securities listed on an exchange and becomes subject to the reporting requirements of the Exchange Act (i.e., goes public), then the securities obtained in exchange for/as a result of exercise of equity awards made under Rule 701 (i.e., pre-IPO) become freely tradeable after 90 days. In other words, the original poster is correct that the IPO lockup governs. I don't know what kind of time period he's subject to, however, and most IPO lockups specifically carve-out exercises of options (including net exercises where some shares are sold to cover taxes, although not for certain executives and directors where it would trigger a public filing under Section 16 of the Exchange Act -- but it doesn't sound like the OP is that kind of executive officer.)

(None of the above is legal advice.)
Must be different industries then as it is not incorrect. I've had underwriters request a lockup from all employees in connection with an IPO maybe five times and they have received it zero. I recall an underwriter making an issue out of it once and the CEO simply said they are not asking employees to sign a lockup and the bank dropped it. I apologize as I took us off topic on the lockup piece as it doesn't really matter here. I still don't understand why you would have to hold the security for a year after exercise.
Last edited by lowndes on Thu Jul 06, 2017 10:41 pm, edited 2 times in total.

Topic Author
beachball
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Re: When should I exercise my incentive stock options?

Post by beachball » Thu Jul 06, 2017 9:27 pm

I want to hold them for a year after exercise so that I can sell them with long term capital gains instead of a short term capital gains. Also, AMT will be triggered whenever I exercise, so if the share price keeps growing, the tax I pay at exercise will keep growing as well.

spammagnet
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Re: When should I exercise my incentive stock options?

Post by spammagnet » Thu Jul 06, 2017 10:03 pm

You plan to hold the stock for a year so LTCG provides a 15% tax advantage. Is the price labile? What is the risk of the stock dropping 15%, or more?

lowndes
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Re: When should I exercise my incentive stock options?

Post by lowndes » Thu Jul 06, 2017 10:10 pm

beachball wrote:I want to hold them for a year after exercise so that I can sell them with long term capital gains instead of a short term capital gains. Also, AMT will be triggered whenever I exercise, so if the share price keeps growing, the tax I pay at exercise will keep growing as well.
The risk of holding the stock would not be worth it to me. I'd sell the stock upon exercise.

noco-hawkeye
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Re: When should I exercise my incentive stock options?

Post by noco-hawkeye » Thu Jul 06, 2017 10:14 pm

lowndes wrote: The risk of holding the stock would not be worth it to me. I'd sell the stock upon exercise.
Me too. Take the money and run (and pay more taxes). At least you will have choices at that point, and you won't have to worry about these options and your job heading south at the same time.

boglesmind
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Re: When should I exercise my incentive stock options?

Post by boglesmind » Thu Jul 06, 2017 10:37 pm

MotoTrojan wrote:
beachball wrote:Another question: Does form 83(b) come into play with incentive stock options?
I believe so, but the 30 day limit from date of grant may keep this option off the table.

Subscribing since I'm about to start vesting ISO's in a small, venture funded company. Low/mid 5-figure strike, with an upper 7-figure estimated value, should we be successful enough for shares to become liquid (even privately).

I'm very nervous about AMT implications, consider it could be a very risky, if even possible, tax hit to exercise options as our valuation climbs.
I recommend googling for AMT impact after dot-com implosion. See
http://www.etaxrelief.com/tax-informati ... elief.html
http://www.journalofaccountancy.com/iss ... elief.html

I'd suggest exercising and selling the same day or at the very least before the end of the calendar year in which you exercised the ISOs.

Boglesmind

Also see http://www.reformamt.org/ for real horror stories and the saga of getting AMT relief after many years of concerted lobbying.

MotoTrojan
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Re: When should I exercise my incentive stock options?

Post by MotoTrojan » Thu Jul 06, 2017 11:46 pm

boglesmind wrote:
MotoTrojan wrote:
beachball wrote:Another question: Does form 83(b) come into play with incentive stock options?
I believe so, but the 30 day limit from date of grant may keep this option off the table.

Subscribing since I'm about to start vesting ISO's in a small, venture funded company. Low/mid 5-figure strike, with an upper 7-figure estimated value, should we be successful enough for shares to become liquid (even privately).

I'm very nervous about AMT implications, consider it could be a very risky, if even possible, tax hit to exercise options as our valuation climbs.
I recommend googling for AMT impact after dot-com implosion. See
http://www.etaxrelief.com/tax-informati ... elief.html
http://www.journalofaccountancy.com/iss ... elief.html

I'd suggest exercising and selling the same day or at the very least before the end of the calendar year in which you exercised the ISOs.

Boglesmind

Also see http://www.reformamt.org/ for real horror stories and the saga of getting AMT relief after many years of concerted lobbying.
More I read the more I think I'll exercise whatever I can early on, without triggering AMT, then do an exercise-to-sell on the rest, when the time is right. AMT just sounds like a hassle for minimal gain (in California).

Topic Author
beachball
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Re: When should I exercise my incentive stock options?

Post by beachball » Fri Jul 07, 2017 3:04 am

So I see three options at this point:

1, Exercise the options now. Incur the AMT and pay taxes on the vested options. Hold the stock for a year and sell it with long term capital gains hoping that the stock price doesn't go down 15%.

2. Exercise the options now, Incur the AMT and pay taxes on the vested options.Sell the stock immediately after the lockup period expires with short term capital gains.

3. Don't exercise the options now. Exercise them when the lockup period expires if they are in the money. Sell them immediately and pay both AMT and short term capital gains. The short term capital gains will be 15% higher than long term and the AMT will potentially be higher than it is right now if the stock goes up.

Which one should I take? Is there a fourth option that I'm not aware of?

MotoTrojan
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Re: When should I exercise my incentive stock options?

Post by MotoTrojan » Fri Jul 07, 2017 7:09 am

beachball wrote:So I see three options at this point:

1, Exercise the options now. Incur the AMT and pay taxes on the vested options. Hold the stock for a year and sell it with long term capital gains hoping that the stock price doesn't go down 15%.

2. Exercise the options now, Incur the AMT and pay taxes on the vested options.Sell the stock immediately after the lockup period expires with short term capital gains.

3. Don't exercise the options now. Exercise them when the lockup period expires if they are in the money. Sell them immediately and pay both AMT and short term capital gains. The short term capital gains will be 15% higher than long term and the AMT will potentially be higher than it is right now if the stock goes up.

Which one should I take? Is there a fourth option that I'm not aware of?
If you sell within a year from purchase I believe AMT is off the table and you'd only pay STCG, which is the lower risk and slightly less lucrative option I'm now thinking may win.

Topic Author
beachball
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Re: When should I exercise my incentive stock options?

Post by beachball » Fri Jul 07, 2017 1:19 pm

MotoTrojan wrote:If you sell within a year from purchase I believe AMT is off the table and you'd only pay STCG, which is the lower risk and slightly less lucrative option I'm now thinking may win.
Ah .. I did not realize that. It's weird that the tax law actually encourages you to hold the equity short term.

MotoTrojan
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Re: When should I exercise my incentive stock options?

Post by MotoTrojan » Fri Jul 07, 2017 1:27 pm

beachball wrote:
MotoTrojan wrote:If you sell within a year from purchase I believe AMT is off the table and you'd only pay STCG, which is the lower risk and slightly less lucrative option I'm now thinking may win.
Ah .. I did not realize that. It's weird that the tax law actually encourages you to hold the equity short term.
Yeah. Assuming a liquid/public company, this is where you could exercise at beginning of year, and then decide at years end whether to sell just after fiscal year (assuming it went up or stayed in money) or sell prior to the year, accepting the loss, but avoiding amt. In my case I'll be vesting most if not all stock prior to liquidity. Thus if things look bright, I'll just exercise whatever I can without AMT.

marcopolo
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Re: When should I exercise my incentive stock options?

Post by marcopolo » Fri Jul 07, 2017 1:53 pm

beachball wrote:So I see three options at this point:

1, Exercise the options now. Incur the AMT and pay taxes on the vested options. Hold the stock for a year and sell it with long term capital gains hoping that the stock price doesn't go down 15%.

2. Exercise the options now, Incur the AMT and pay taxes on the vested options.Sell the stock immediately after the lockup period expires with short term capital gains.

3. Don't exercise the options now. Exercise them when the lockup period expires if they are in the money. Sell them immediately and pay both AMT and short term capital gains. The short term capital gains will be 15% higher than long term and the AMT will potentially be higher than it is right now if the stock goes up.

Which one should I take? Is there a fourth option that I'm not aware of?

4. Exercise now, sell enough to pay for the exercise (and any tax due). Let the rest ride for at least a year, then sell and pay any LTCG. That way you are playing with house money.
Once in a while you get shown the light, in the strangest of places if you look at it right.

HornedToad
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Re: When should I exercise my incentive stock options?

Post by HornedToad » Fri Jul 07, 2017 4:15 pm

Wealthfront has several articles discussing this as well as a stock simulator for various other tech IPO's. At your volume/dollar value this might be overkill to plan to sell 10-20% a quarter and so the existing strategies listed look good.

https://blog.wealthfront.com/when-to-ex ... k-options/
https://blog.wealthfront.com/should-i-sell-my-stock/

As an aside, 83b applies when you are early exercise the stock (generally when its granted) and not when you are planning on selling. You generally do this if you are an early employee when the tax hit is manageable: https://blog.wealthfront.com/always-file-your-83b/

Topic Author
beachball
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Re: When should I exercise my incentive stock options?

Post by beachball » Fri Jul 07, 2017 7:08 pm

HornedToad wrote: As an aside, 83b applies when you are early exercise the stock (generally when its granted) and not when you are planning on selling. You generally do this if you are an early employee when the tax hit is manageable: https://blog.wealthfront.com/always-file-your-83b/
Thanks for the response. I'm curious to know if 83b applies at all in my case. My incentive stock option agreement does not allow for early exercise before the options vest. Ie. I could not have exercised them on the grant date. Would it even have been possible to file 83b? Can I file it on the day they vest?

Topic Author
beachball
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Re: When should I exercise my incentive stock options?

Post by beachball » Fri Jul 07, 2017 7:54 pm

I also didn't realize before now that the AMT could be used to offset the tax on any eventual gains.

Topic Author
beachball
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Re: When should I exercise my incentive stock options?

Post by beachball » Fri Jul 07, 2017 7:58 pm

marcopolo wrote:
beachball wrote:
4. Exercise now, sell enough to pay for the exercise (and any tax due). Let the rest ride for at least a year, then sell and pay any LTCG. That way you are playing with house money.
I cannot do this because the lockup period has not yet expired. I could potentially wait for lockup to expire and then do this... But that delays the starting of the LTCG clock.

HornedToad
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Re: When should I exercise my incentive stock options?

Post by HornedToad » Fri Jul 07, 2017 8:11 pm

beachball wrote:
HornedToad wrote: As an aside, 83b applies when you are early exercise the stock (generally when its granted) and not when you are planning on selling. You generally do this if you are an early employee when the tax hit is manageable: https://blog.wealthfront.com/always-file-your-83b/
Thanks for the response. I'm curious to know if 83b applies at all in my case. My incentive stock option agreement does not allow for early exercise before the options vest. Ie. I could not have exercised them on the grant date. Would it even have been possible to file 83b? Can I file it on the day they vest?
I don't believe it does. It wouldn't benefit you because if you can't exercise them before they are vested then you would exercise when they actually vest and there's no difference between 83b and actually exercising. It also has all the risks of normal exercise and hold since the stock has actual value

When 83(b) is very valuable is if you are a founder or the first ~20-40 employees of a company when the exercise price is a penny a share up to maybe $1/share at the high end.

Calidude
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Re: When should I exercise my incentive stock options?

Post by Calidude » Fri Jul 07, 2017 9:03 pm

Not to belabor the point on the lockup, but many companies (virtually all the ones I represented in private practice as well as the company I currently work at) include a binding 180 day lockup provision in the option grant agreement so the underwriters would only need to have people sign new lockup agreements in connection with the IPO if they were looking for longer periods which is atypical but not unheard of these days.

In any event these are generally first world problems to have (particularly MotoTrojan's). I hope my company (or a future one) provides me with that sort of liquidity opportunity so I can put my hard earned but otherwise of limited personal value skills to the test.

MotoTrojan
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Re: When should I exercise my incentive stock options?

Post by MotoTrojan » Fri Jul 07, 2017 10:33 pm

Calidude wrote:In any event these are generally first world problems to have (particularly MotoTrojan's). I hope my company (or a future one) provides me with that sort of liquidity opportunity so I can put my hard earned but otherwise of limited personal value skills to the test.
I'm still playing the lottery somewhat, but that's how any start-up should be :). Hoping to post an "I won the game" thread before I'm 30-35, but believe me I'm taking risks, working hard, and leaving much more sure-thing money on the table.

MotoTrojan
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Re: When should I exercise my incentive stock options?

Post by MotoTrojan » Sat Jul 08, 2017 12:53 pm

AMT specific question: What taxes is it based against to see if it is utilized? Just federal income tax? FICA? Others?

I see CA has it's own AMT tax which further complicates things. Wanting to put together a simple means of determining how much regular income vs. options value I can do in a year without activating AMT. If anything simple like that already exists, let me know!

Calidude
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Re: When should I exercise my incentive stock options?

Post by Calidude » Sun Jul 09, 2017 10:42 am

MotoTrojan wrote:
Calidude wrote:In any event these are generally first world problems to have (particularly MotoTrojan's). I hope my company (or a future one) provides me with that sort of liquidity opportunity so I can put my hard earned but otherwise of limited personal value skills to the test.
I'm still playing the lottery somewhat, but that's how any start-up should be :). Hoping to post an "I won the game" thread before I'm 30-35, but believe me I'm taking risks, working hard, and leaving much more sure-thing money on the table.
You are young so as long as you keep increasing your skills commensurate with the market, you will have other opportunities even if this one doesn't work out.

If your company needs an experienced general counsel let me know.

:sharebeer

Topic Author
beachball
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Re: When should I exercise my incentive stock options?

Post by beachball » Mon Jul 10, 2017 8:10 am

MotoTrojan wrote:Wanting to put together a simple means of determining how much regular income vs. options value I can do in a year without activating AMT. If anything simple like that already exists, let me know!
You can use the same tax software you used for filing your 2016 return to simulate the AMT for 2017.

bberris
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Re: When should I exercise my incentive stock options?

Post by bberris » Mon Jul 10, 2017 8:27 am

I think you have this wrong about taxes. The original stock or option grant is taxable at ordinary rates including payroll tax. You would only pay ltcg if the stock went up between exercise and sale, and then only the capital gain (difference between exercise and sale) would be taxed at favored rates.

Because of that, there are only two reasons you would want to exercise the option. One, if the options are expiring and they are in the money. Two, if there is a significant dividend being paid on the stock. To understand why, if you exercise you loss exposure is the entire price you paid. With stock options, you only could lose the value of the option.

MotoTrojan
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Re: When should I exercise my incentive stock options?

Post by MotoTrojan » Mon Jul 10, 2017 10:10 am

bberris wrote:I think you have this wrong about taxes. The original stock or option grant is taxable at ordinary rates including payroll tax. You would only pay ltcg if the stock went up between exercise and sale, and then only the capital gain (difference between exercise and sale) would be taxed at favored rates.

Because of that, there are only two reasons you would want to exercise the option. One, if the options are expiring and they are in the money. Two, if there is a significant dividend being paid on the stock. To understand why, if you exercise you loss exposure is the entire price you paid. With stock options, you only could lose the value of the option.
ISO bring some weird (I would say poorly thought out) dynamics that a traditional option doesn't have. If exercised and held for a year you actually get LTCG on the spread at purchase, rather than only on increase in value. Also, you pay AMT in many cases, on the spread at purchase, and this can be difficult to get back, even if it becomes a total loss. In cases like mine, that AMT has the potential to be 100x my strike price; impossible to pay for me.

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beachball
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Re: When should I exercise my incentive stock options?

Post by beachball » Tue Jul 11, 2017 3:49 pm

MotoTrojan wrote: ISO bring some weird (I would say poorly thought out) dynamics that a traditional option doesn't have. If exercised and held for a year you actually get LTCG on the spread at purchase, rather than only on increase in value. Also, you pay AMT in many cases, on the spread at purchase, and this can be difficult to get back, even if it becomes a total loss.
Could you please explain the part about LTCG being on the spread at purchase? My understanding was that if you exercise at $1 and the market price at purchase is $2 but you sell after a year when the market price is $3, you have to pay LTCG on $3-$1 ie. The spread at sale.

MotoTrojan
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Re: When should I exercise my incentive stock options?

Post by MotoTrojan » Tue Jul 11, 2017 4:14 pm

beachball wrote:
MotoTrojan wrote: ISO bring some weird (I would say poorly thought out) dynamics that a traditional option doesn't have. If exercised and held for a year you actually get LTCG on the spread at purchase, rather than only on increase in value. Also, you pay AMT in many cases, on the spread at purchase, and this can be difficult to get back, even if it becomes a total loss.
Could you please explain the part about LTCG being on the spread at purchase? My understanding was that if you exercise at $1 and the market price at purchase is $2 but you sell after a year when the market price is $3, you have to pay LTCG on $3-$1 ie. The spread at sale.
You're correct about LTCG, I meant purchase spread in addition to gains, not purchase alone; poorly phrased. AMT however will apply for the difference in spread ($2-$1) if you fall under AMT, at time of exercise, not sale. Then if you hold for a year you'll pay LTCG on $3-$1, double taxing, but get credit for the ordinary AMT tax. Hence why AMT is risky, as you can theoretically lose a lot more than the exercise price if the value diminishes.

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beachball
Posts: 21
Joined: Tue Jul 04, 2017 1:31 am

Re: When should I exercise my incentive stock options?

Post by beachball » Tue Jul 11, 2017 5:03 pm

MotoTrojan wrote:but get credit for the ordinary AMT tax. Hence why AMT is risky, as you can theoretically lose a lot more than the exercise price if the value diminishes.
I'm interested in learning about the risks and strategies for getting that AMT back if the value diminishes. There was a law passed during the great recession that gives some relief, but I'm not sure if it got renewed: http://fairmark.com/amt/credit-refundable.htm

Does anyone know the strategies for recovering AMT credit in case the stock value tanks?

deanmoriarty
Posts: 225
Joined: Tue Jan 28, 2014 1:19 am

Re: When should I exercise my incentive stock options?

Post by deanmoriarty » Mon Feb 11, 2019 6:48 pm

beachball wrote:
Tue Jul 11, 2017 5:03 pm
MotoTrojan wrote:but get credit for the ordinary AMT tax. Hence why AMT is risky, as you can theoretically lose a lot more than the exercise price if the value diminishes.
I'm interested in learning about the risks and strategies for getting that AMT back if the value diminishes. There was a law passed during the great recession that gives some relief, but I'm not sure if it got renewed: http://fairmark.com/amt/credit-refundable.htm

Does anyone know the strategies for recovering AMT credit in case the stock value tanks?
Old post, but still relevant. I am in this boat myself, and haven't found any other way than taking a credit up to the amount of regular tax minus amt tax, each and every single year until the full credit is exhausted.

In my case, I have about $70,000 of credit and with my tax situation I can redeem it to the tune of ~$10,000 a year, so it would be nice if the IRS offered a one-time redemption for all this money.

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