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Date:   13 Mar 2009
From:   Lukas

Dear Mr. Gray

On May 2, 2008, I exercised an ISO for 25,000 shares with a per share option price of $19.00 and fair market value of $140.47.

When I exercised the option, I swapped 2,820 shares with a tax basis of $136.85 and 561 shares with a tax basis of $12.75, plus cash of $79.24. These shares came from previous stock grants and options that were held for the time required for a qualified disposition.

On November 13, 2008, I sold 10,000 shares at $79.24 per share in a disqualified disposition. I am still holding the remaining shares.

What tax basis do I use to calculate the disqualified disposition?

Sincerely,
Lukas

Answer

Date:   6 Apr 2009

Hello Lukas,

Zero. The tax basis stays with the original shares that you "swapped." Only the cash paid of $79.24 is assigned to the shares you received.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.