AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
NSO - income or short term gain?
Posted by: Island, September 15, 2014 04:24PM
I have 262 exercisable NSO options, grant date is 3/2/12, grant price is $57.25.

Current stock price is $120

If i sell it on a cashless exercise, what is income and/or what is short term gain?

Thank your for help.

Island

Re: NSO - income or short term gain?
Posted by: Art, September 15, 2014 05:49PM
The difference between the $120 market price and the grant price of 57.25 will be added to box 1 of your W-2 form (and shown as code V in box 12) and so it is taxed as ordinary income.

If you immediately sell it, in a same day exercise and sale, your cost basis is 57.25 plus the small fee/commission charged by the broker, so you will show a small short-term capital loss on the form 8949 you fill out, which transfers to schedule D.

Re: NSO - income or short term gain?
Posted by: Island, September 15, 2014 06:00PM
Thank you very much

Re: NSO - income or short term gain?
Posted by: Kaye Thomas, October 18, 2014 10:11PM
I'm guessing Art meant to say your cost basis would be $120, not $57.25; in any event, that's what he should have said. Your cost basis is the amount paid for the stock plus the amount of income you report on the exercise of the option. The broker's commission on the sale is usually subtracted from the sale proceeds rather than added to the basis, but the result is the same either way.

Kaye Thomas
Fairmark.com

Re: NSO - income or short term gain?
Posted by: Art, October 20, 2014 04:25AM
yup. fingers were faster than my thinking :^(
Thanks

Re: NSO - income or short term gain?
Posted by: MadDog, December 30, 2014 08:23PM
Perhaps I'm the only one confused. Seems to me the OP means to say "if I exercise it on a cashless exercise,".....and then perhaps he questions what would happen if he later sold shares??

So if he uses previous owned shares for a cashless exercise he trades 125 shares, FMV $15,000, as the exercise price of 262 shares ($15,000 strike price), and then has:

1 - a 125:125 share tax-free exchange under section 1036, with 125 shares having a basis of whatever they always were (we don't know) and

2 - 137 newly acquired shares, subject to section 83, so FMV $16,440, received for -0-, so $16,440 compensation, and basis of $120/share.

So he now has the original block, same holding period, same basis, and a new 137 shares with date-of-exercise holding period and $120/share basis.

Re: NSO - income or short term gain?
Posted by: Kaye Thomas, December 30, 2014 08:58PM
MadDog makes a good point that we should have clarified what was meant by cashless exercise. Most times, people mean they are cashing out without tendering the option price or tax withholding, as these amounts are deducted from the sales proceeds. The option holder receives a check representing the option's built-in profit reduced by tax withholding. But it's also possible, at some companies, to exercise an option by paying the exercise price in shares of stock the option holder already owns, and some people call this a cashless exercise. As MadDog indicates, the answer to the questions posed by the OP are more complicated in this case.

Kaye Thomas
Fairmark.com



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