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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15733
Experience:  15years with H & R Block. Divisional leader, Instructor
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Early excercise

Customer Question

early excercise
Submitted: 1 year ago.
Category: Tax
Expert:  Robin D. replied 1 year ago.

Hello

Please post more about your question below.

Customer: replied 1 year ago.
My company is offering incentive stock options. I was a little slow to submit the document which expressed my intent for early exercise, and they responded saying that a new valuation will be in place starting next month, and that I may want to talk with a tax advisor to fully understand my tax risk. Hoping you can help here.
Expert:  Robin D. replied 1 year ago.

The benefit to exercising your options early is that you start the time on qualifying for long-term capital gains treatment. If your company doesn’t succeed and you are never able to sell your stock despite having invested the money to exercise your options is your risk factor on early option.

If you don’t exercise any of your options until your company gets acquired or goes public and you sell right away then you will pay ordinary income tax rates on the amount of the gain.

Expert:  Robin D. replied 1 year ago.

Section 83 of the Internal Revenue Code states that you do not have to recognize income from owning equity in a company until that stock vests.

You will owe no taxes at the time of exercise if you exercise your stock options when their fair market value is equal to their exercise price and you file a form 83(b) election on time.

Any future appreciation will be taxed at long-term capital gains rates if you hold your stock for more than one year post exercise and two years post date-of-grant before selling. If you sell in less than one year then you will be taxed at ordinary income rates.

When you exercise your stock option, you pay the exercise price of the option for each share. The IRS considers the difference between the current fair market value and your exercise price as income in the current calendar year.

If you exercise your stock options early, you buy the stock from your employer. However, if you haven’t vested that stock yet, Section 83 of the Revenue Code states that you don’t take ownership for tax purposes until it vests. the IRS expects you to declare income based on the difference between the exercise price and the value of that stock on that date. That can create a large tax liability for you.

Customer: replied 1 year ago.
How does this play into AMT, and those boundaries? As far as I know I've already exceded that threshold, but they listed it as something I should consider
Expert:  Robin D. replied 1 year ago.

I know the above was a lot of information but to simplify as much as a I dare, if you file a Section 83(b) election, you do not have to pay tax when the stock vests, only on the later sale.

You are likely to incur an AMT if you exercise your options after their fair market value has risen above your exercise price, but you do not sell them.

The AMT you are likely to incur will be the federal AMT tax rate of 28% times the amount by which your options have appreciated based on their current market price

Expert:  Robin D. replied 1 year ago.

I would only further advise you bring this up with your personal tax preparer so they can do an estimate based on all your income and information. That would be beyond the scope of the service here.