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Basics: Underwater Options


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Stomach Volatility In Your Company's Stock Without Losing Your Mind

Joanna Glasner and Bruce Brumberg
Don't be discouraged by stock-price volatility. As the experts note, equity compensation is a tool for building wealth in the long term.

Stockbrokers' Secrets: Strategy For Volatile Markets

W.E.B. Bantling
Market volatility and declines rattle even the most experienced holders of stock compensation (and their advisors). Here are 10 topics I find myself discussing over and over again with my best clients.

Better Late Than Never: Stock Option Strategy For The Market Upturn This is premium content

Michael Beriss
When stock markets rise, question the urge to exercise your options for quick profits as soon as possible. Exercising too early can be a big mistake.

Fundamentals Of Employee Stock Purchase Plans (Part 4): Down Markets And Other Tax Topics This is premium content

Alisa Baker
In Part 4 we consider the taxation of employee stock purchase plans (ESPPs) that are not qualified under Section 423, and the tax issues of down markets, death, and withholding.

Manage Your Expectations To Avoid The Option Blues

Loren Rodgers
You may feel let down by your stock options if your company's stock price has dropped, leaving your options underwater. Getting less than you expected is something that inevitably occurs in a free market, and it is helpful to be prepared for losses as well as gains.

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What are "underwater" stock options? Why shouldn't I exercise them?

Underwater stock options have an exercise price which is greater than the market price of the underlying stock. For various reasons, you do not want to...

How have the stock-market volatility and economic fluctuations of recent years changed stock grant practices?

Changes in executive compensation and equity pay practices stemming from the downturn of 2008 and 2009 were extensive. In general, during the recovery the focus in stock compensation has shifted...

I have underwater options. Will I get a tax loss when I exercise them? This is premium content

No. When your exercise price (e.g. $10) is higher than the...

I have underwater stock options that are about to expire unexercised. Can I write these off as some type of loss on my tax return? This is premium content

Wishful thinking! Just as you are not taxed on the value of the options at grant, you may not write off any expired unexercised options, whether underwater or in the money...

What is an options exchange? This is premium content

An options exchange is an alternative to repricing underwater stock options. Most companies set an exchange ratio of underwater options for new ones at the current market price so that the total value of the new options is equal to that of the previous options. Alternatively...

What approaches do companies apply to underwater stock options? This is premium content

The number of companies, and their employees, with underwater stock options has substantially increased, especially since the historic drop of the stock markets in October 2008. Various surveys and corporate examples show that...

What factors should I consider in accepting an option exchange, and what is the process? This is premium content

Deciding whether or not to accept an options exchange involves many variables, including the potential for...

What is the tax impact on me if my company modifies outstanding stock options or SARs, such as by extending the option term? This is premium content

With approval from the board, and perhaps also shareholders, your company can modify outstanding grants in a way that is consistent with its stock plan. However, it should avoid tax pitfalls for you and the company, such as...

What impact can a stock option exchange have on employees who are tax residents outside the US? This is premium content

While stock option exchanges usually do not create tax consequences for participants who are US tax residents, employees who are tax residents of other countries may be taxed when...

If my company offers me options in exchange for underwater options, or reprices them, will there be any tax impact on me? This is premium content

Very few companies arrange a straight repricing of outstanding options. Companies concerned about widespread and deeply underwater options may offer...

My company will let me exchange my underwater options for restricted stock. What is the tax impact? This is premium content

The standard option-for-option exchange is not taxable. When you exchange underwater options for restricted stock, the value of the shares...

I have both in-the-money and underwater options. If I exercise them all and immediately sell the stock, can I offset the gains with the losses on the underwater options? This is premium content

This is wishful thinking, because these are two separate transactions. It does not make sense to...

Can my ESPP go underwater or be affected in other ways by a down market? This is premium content

Employee stock purchase plans cannot be "underwater" in the traditional sense of having a purchase price greater than the current stock price. Down markets can create special opportunities and unique issues for ESPPs. For example, with an ESPP...

Can restricted stock and performance shares go underwater? This is premium content

Not in the way stock options can. Restricted stock is worth the full market value of the stock when it vests (or, with restricted stock units, when shares are delivered). It does not matter if...

Can the exercise price of outstanding stock options ever be raised or lowered? Can the options be repriced? This is premium content

Generally, the exercise price cannot be raised without your written consent...

If my company or a third party buys my employee stock options for cash, how is this taxed? This is premium content

You recognize ordinary income for the full value of the cash payment. Any deferred portion of the cash sale proceeds is not taxable until...

In an acquisition, what happens to my underwater stock options? This is premium content

This depends on the provisions in your stock plan and the structure of the merger or acquisition. According to the flexibility for adjusting outstanding grants that your company's stock plan provides, the buyer can...

If my company cancels my underwater stock options, will they still count against the $100,000 ISO limit? This is premium content

This depends on whether the ISOs are already vested. According to the final IRS regulations on ISOs...

What tax treatment applies if I exercise vested pre-IPO options that now cost more to exercise than they are worth? This is premium content

In a public company you would never exercise underwater stock options. In a private company...

In a divorce case, how do you argue that underwater stock options have value? This is premium content

When the net intrinsic value of the stock is zero, the attorney for the nonemployee-spouse has two ways to obtain...

At death, the value of options is included in the gross estate for estate tax purposes. But what happens if the stock's value drops below the exercise price and the options expire unexercised? This is premium content

When options are exercised, generally the estate or beneficiary is able to take an income tax deduction for the amount of estate taxes already paid by the estate. But when they are not exercised you cannot take the deduction against other income...

How many employees at Microsoft elected to exchange their underwater options for cash?

Microsoft was one of the first companies to have an underwater options exchange for cash, and did so long before the market downturn in 2008. According to a statement the company issued on...

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