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TaxWhisperer
TaxWhisperer, Enrolled Agent
Category: Tax
Satisfied Customers: 619
Experience:  Tax Problem Solver extraordinare. I address IRS Notices, Liens, Levies, audits, etc.
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If I have vested stock options at my current company and join

Resolved Question:

If I have vested stock options at my current company and join a new company, could the new company purchase the options at my old company on my behalf to avoid taxation? (i.e. If the new company paid me, of course, I'd have to pay income taxes on that amount and would have less to use to purchase the options at the old company.) If so, is there a limit to the amount? Thx!
Submitted: 1 year ago.
Category: Tax
Expert:  TaxWhisperer replied 1 year ago.

TaxWhisperer :

The answer lies in the paper work that you signed when they issued the stock. Typically, when you leave the company, you have 30-90 days to sell the stock, and if the stock is not publicly traded you may have to selll the stock back to the company.

TaxWhisperer :

Sometimes the agreement is that you only have to buy the stock.

TaxWhisperer :

Actually this depends on whether you have Incentive Stock Options or Non-qualified. I am assuming you have ISOs.


 


 

TaxWhisperer :

Hi, there. I see you are in cat. Do you know if these are NQ's or ISOs?

TaxWhisperer :

...

Customer: Hi. That's not quite the situation. As I described I don't have own the stock - I just have options (non-quality btw, not ISO). Can a third party purchase the options on my behalf (yes, within the 90 day period)? Thx.
TaxWhisperer :

If they are non-qualfied stock options, then you will realize taxable income upon the sale. It doesn't matter who you sell it to.

TaxWhisperer :

The botXXXXX XXXXXne is that I think you are stuck.


 

TaxWhisperer :

Are you trying to see if you can "transfer" the options to the new employer?

TaxWhisperer :

You cannot transfer the options (that's in the agreement you signed.)

TaxWhisperer :

Do you have clause that says you must excercise the options within so many days of departure?

TaxWhisperer :

Is this company publicly traded?

TaxWhisperer :

It says you are typing but I don't see anything.

Customer: Sorry they are ISO's. And I just read in the agmt that exercise of option may be done "in cash, by certified or bank check". Can the third party issue a check to my company to purchase the shares on my behalf?
TaxWhisperer :

 


Okay, they are ISOs.

TaxWhisperer :

And you would like to excercise the options and not incur a tax hit?

Customer: Both companies are private
Customer: Yes correct!
TaxWhisperer :

Do you have the funds in hand to pay for the option excercise or are you short money?

TaxWhisperer :

Are the terms of your agreement, such that you can excercise the options and NOT have to sell the stock back to the company?

TaxWhisperer :

Private companies may require you to do this. The reason is because if too many people hold their stock, they beceom


a "public company". They don't want to do this till they are ready.

Customer: I could borrow funds to do it but would rather not of course. I may be able to negotiate a signing bonus with the new company but thought it more efficient for them to just purchase the options on my behalf.
Customer: The company does not require me to sell them right back to them.
TaxWhisperer :

But they can't purchase the options!

TaxWhisperer :

Okay, but I bet you cannot "transfer" the options. You must be the one to excercise them.

TaxWhisperer :

And just to be clear you have a timeframe within which you need to excercise the ISOs.

TaxWhisperer :

If you don't have to excercise them, then just hold on to them. (Case closed!) but I assume you are under a time limit to excercise.

Customer: Yes, must exercise (or lose them) within 90 days of leaving the company
TaxWhisperer :

Okay and there should be a non-transferability clasue.

Customer: It's not a transfer, though. They would just be writing a check on my behalf...
TaxWhisperer :

(I am not trying to be difficult, I am trying to "parse" this so we can see what options you really have.)

TaxWhisperer :

But your original question involved the company "getting the options", or did I mistake that.

TaxWhisperer :

If the new company is paying for them, then YOU are excercising them and they


are just loaning you or bonusing you the money.

TaxWhisperer :

Then after the excercise, YOU would own the stock.

Customer: Yes but it's not a loan. They'd be giving me a signing bonus in order for ME to exercise the options. But if they do that I'll have to pay taxes on the bonus leaving me less money to buy the shares.
TaxWhisperer :

I'm trying to step through this one baby step at a time. Whether it's a loan or a bonus, really isn't my focus at this time.

TaxWhisperer :

So, we're in agreement that you want to excercise the ISOs and own the stock and you just want to find out if the new company can get the money to you somehow.

TaxWhisperer :

Your original question asked if the new company could "purchase your options" that's why I am confused.

Customer: Yes. But rather than give ME the money can they give it straight to the old company?
TaxWhisperer :

If the new company issues a check, it is either a taxable bonus to you or a non-taxable loan to you--the fact that they write it to your old employer is not material.

TaxWhisperer :

They are paying your bill.

TaxWhisperer :

If I had a comopany instead of paying me, pay my monthly mortgage, or buy something for me, it is still taxable income to me.

TaxWhisperer :

I have an idea, though.

TaxWhisperer :

I'm not sure your new company will go for this.

Customer: Ok. That answers my question then. Oh well...
TaxWhisperer :

Do you want to hear my idea?

Customer: Oh what's your idea!
TaxWhisperer :

\Like I said, I am not sure they would go for this.

TaxWhisperer :

You get a loan from the company to excercise the options. The new company and you agree that the loan is "secured" by the stock you have been issued.

TaxWhisperer :

If the stock goes up in value, you pay back the loan when you sell.

TaxWhisperer :

If the stock goes down in value (or to zero), the company forgives the loan.

TaxWhisperer :

Forgiving the loan will be taxable income at that time.

TaxWhisperer :

By the way, is the "market value" of the stock very different from the excercise price?


 

Customer: Creative! But a lot to ask of a new employer and like you said prob wouldn't go for it!
TaxWhisperer :

I didn't know your standing with them. For all know, you're their "walk on water" new head of R&D and can command this type of thing.

Customer: The value is higher than exercise price so I do know I'll also be responsible for the implied appreciation unfortunately
TaxWhisperer :

Okay, you understand about alternative minimum tax on ISOs then.


 


I felt like I had to mention for completeness sake.


 


If you're all set, can you please accept the response.

Customer: Will do. Thx for your thoroughness! Take care.
TaxWhisperer, Enrolled Agent
Category: Tax
Satisfied Customers: 619
Experience: Tax Problem Solver extraordinare. I address IRS Notices, Liens, Levies, audits, etc.
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