By exercising your options sooner rather than later, you improve the chances that you’ll qualify for favorable long-term capital gain tax treatment when you sell your shares. In contrast, when you sell after a shorter ownership period, post-exercise gains are taxed at your ordinary rate, which could be as high as 37%.
When should I sell my incentive stock options?
If your sole priority is minimizing AMT, you should sell your shares in the same year as you exercise your options. You do not need to make an AMT adjustment if you exercise and sell in the same year. The sale will be a disqualifying disposition and you will pay ordinary income tax.
What is the exercise price of an incentive stock option?
If the sale is a disqualifying disposition, then the employee will have to report any bargain element from the exercise as earned income. Say Pat receives 1,000 non-statutory stock options and 2,000 incentive stock options from their company. The exercise price for both is $25.
What should you know about exercising stock options?
See About Stock Options for more information. Tip: Exercising your stock options is a sophisticated and sometimes complicated transaction. The tax implications can vary widely – be sure to consult a tax advisor before you exercise your stock options.
Is there a vesting period for incentive stock options?
Unlike non-statutory options, the offering period for incentive stock options is always 10 years, after which time the options expire. Vesting: ISOs usually contain a vesting schedule that must be satisfied before the employee can exercise the options.
Do you have to pay tax on incentive stock options?
Updated Feb 11, 2018. An incentive stock option (ISO) is a type of employee stock option with a tax benefit that, when exercised, it isn’t necessary to pay ordinary income tax. Instead, the options are taxed at a capital gains rate.
