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TLDR Exercise early and File an 83(b) Election. Exercise and Hold for Long Term Capital Gains. Exercise Just Enough Options Each Year to Avoid AMT. Exercise ISOs In January to Maximize Your Float Before Paying AMT. Get Refund Credit for AMT Previously Paid on ISOs. Reduce the AMT on the ISOs by Exercising NSOs.
Stock options at private companies are often issued with a low strike price. This allows you a chance to buy shares for a low cost, which requires less cash up front. This is a good thing when you consider how your cash flow will be impacted by an exercise ? but this is only one thing to consider.
The receipt of these options is immediately taxable only if their fair market value can be readily determined (e.g., the option is actively traded on an exchange). In most cases, however, there is no readily ascertainable value, so the granting of the options does not result in any tax.
Example for a Non-Qualified Stock Option: You made $9. This $9 is taxed as wages and will show up on your W-2. Since there was a stock sale, it ALSO shows up on your 1099-B as a $9 gain. A $9 gain in two places could lead to a maximum tax rate of over 100% if reported twice.
You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income.
In short, a stock option gives you the right to buy company shares at a pre-set price that's hopefully lower than the current share price. In this article, we'll talk about what employer stock options are, how they work, and how to calculate what your stock options might be worth.