ISOs › Taxes

Here's some advice for financial fitness: take stock of taxes before you exercise! When and how you exercise your stock options can have a major impact on how much tax and which taxes you'll pay.

PowerPoint presentation (in PDF) that the editorial team of myStockOptions.com developed to provide a convenient crash course on the basics of incentive stock options. myStockOptions Pro members may request permission to use it for company employees or financial-planning clients.

The final IRS regulations on ISOs, last modified in 2004, clarified points that are of greater concern to ISO-granting companies than to individual optionholders and advisors (they did not affect the basic tax structure or the AMT treatment). However, for the purposes of ISO-related financial planning, the rules do clarify certain advanced topics, such as the wash sale rule, stock swaps, transfers to trusts, and transfers in divorce, and they confirm current interpretations and practices. A detailed discussion about the background of the final ISO regulations occurs in the text of the proposed regulations.

This IRS publication explains the tax treatment of many kinds of income, including that from NQSOs, ISOs, and restricted stock/RSUs.

First: Remember that the sale of ISO stock will raise AMT implications (alternative minimum tax). Second: The matter depends on how long you hold the stock...

"Disqualifying disposition" is the legal term for selling, transferring, or exchanging ISO shares before satisfying the ISO holding-period requirements: two years from date of grant and one year from date of exercise. If you sell, transfer, gift, or short the stock too soon, you lose...

While you lose the opportunity to have the lower long-term capital gains rate apply to the difference between the exercise and sale price, the alternative minimum tax (AMT) no longer applies. You do have compensation income and perhaps short-term capital gains equal to...

Unlike with NQSOs, there is no federal income tax withholding at...

For an ISO exercise in which you hold the stock, nothing is...

When you sell ISO shares early...

Yes. Unlike with NQSOs, federal tax laws currently provide that Social Security taxes are not owed upon exercise of ISOs, regardless of whether you soon sell the stock...

The Internal Revenue Code is very clear on the requirements of favorable tax treatment for ISOs. Among other conditions...

Capital gain is income that arises from the sale of a capital asset. Gain from the sale of securities held for investment, such as shares acquired from stock compensation...

The holding period to determine whether a capital gain is long-term or short-term starts on the...

The treatment for tax-loss harvesting is similar to that of owning and selling any two stocks. The income-tax reporting for multiple transactions is...