AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
NQSO issued cash dividends
Posted by: miamicuse, April 22, 2015 11:42PM
Years ago (1999-2008) I was issued NQSO every year. Each batch of options I received had a vesting schedule and an expiration date.

So usually I just wait till the expiration date then exercise them.

Then in 2010 I decided to leave the company, and I was told if I didn't exercise my options by my last day of employment I would lose my options. I opted to keep the options and did a cashless exercise. I didn't know a cashless exercise is equivalent to a buy and sell on the same day - hence short term capital gains and paid excessive taxes for the lack of planning.

The company is privately held and not traded on any stock exchange.

I owned about 100,000 shares and from their own financial statement they are worth about $12 a share. My option price varies from $1 to $3 over the years.

Last year I approach them about the possibility of a buy back, and they told me they would consider it, but they also told me if they do grant my buy back request, that I would need to sell it all back in a single transaction. I wasn't ready to proceed with doing it as a single transaction and instead wanted to sell a fixed number of shares per year by looking at my other incomes and how that affects my AGI each year. So my question is, if I do sell it as a single transaction, they would all be taxed as a long term capital gains. Is it better to sell sooner, or later? I read from somewhere the long term capital gains tax will increase soon.

Second that I was informed recently that this company had a very good year and they will be issuing cash dividends to all shareholders for $2 a share. That translates to a tidy sum of about $200,000 for me. Will this be taxed the same as any stock dividends that I obtain from publicly traded security?

Since this is a surprise, I never planned for it and I am concerned how this would affect me tax wise. Will it raise my AGI so much that it kicks me from a 25% bracket to a 36% bracket, resulting in my other income being taxed at a much higher rate? Is there any way to mitigate that? Is there any way to minimize my tax liability from this dividends?

Thank you very much.

Re: NQSO issued cash dividends
Posted by: Art, April 23, 2015 06:29PM
First let's see if we can establish your cost basis in these shares.

Geneally speaking exercise of NQSOs results in a cost basis of yuor Exercise Price plus the Bargain Element. The Bargain Element is the gain upon exercie, namely the difference between Market Price and exercise price.

The Bargain Element should have been shown in the year of exercise on your W-2 form, in Box 12 code V. And the B.E. should have been included in your taxable wages shown on the W-2.

Next, what hapened?

If you did a same day esercise and sale, you should no longer own the shares. And should not have had a short term capital gain. Perhaps you can tell us more?

Re: NQSO issued cash dividends
Posted by: miamicuse, April 24, 2015 01:29AM
Thanks for the reply. No, I did not do a same day exercise and sale. I only exercised my option to buy, so a few days before I left the company I did a cashless exercise. I gave up some of the shares in exchange of the rest of the shares. I think the last batch of shares was about 30,000 shares, I end up receiving a net of 23,000 shares, so about 7000 shares were sold to obtain the cash needed to buy the 23,000 shares. That was several years ago.

So now I owned about 100,000 shares. I don't think whether the shares was NQSO or ISO matter anymore right? I understand if I do a buy back I will be taxed on the capital gains which is the current price minus the various share prices when I exercised those shares over the years. I have already been taxed on the bargain elements on the years I did the exercizing.

Re: NQSO issued cash dividends
Posted by: Art, April 24, 2015 05:47PM
So it seems the shares you immediately sold to generate cash to pay for the exercise, have a cost basis equal to the exercise price plus the bargain element, perhaps a tiny bit more to account for broker's fee or commission.

That immediate sale produced a zero or tiny S-T capital loss for the shares sold immediately.

The shares you kept have the same basis, but the capital gain/loss could vay depedning on sales price.

If they were NQSOs, the bargain element of all exercised options shows up in the W-2 box 12 code v amount. If ISOs, they are not so coded. And if they were ISOs, if sold off after year end, the B.E. amount is entered on the 6251 AMT form as possible AMT income. If they were ISOs, come back here as disqualifying disposition may get involved

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