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Subject:   Question?
Date:   Thu, 19 Apr 2001
From:   Ata

Hi Michael,

I just read your informative article on the WEB about ISO plans. I do have one question about a word you used there - holding:

Q: what do you mean be "holding" a stock? buy it (execise it) and keep it for a while? or "just keep the option granted by the employer without doing anything with it?" i.e., If I am vested in 50% of the options granted already and the grant date is prior to two years ago, when I execise and dispose of them simultaneously, will I still be taxed on the money gained as ordinary income with the lower tax (20%)? Or is that only possible if I bought (execised the options) and "HELD" them for over a year?

Thanks,
Ata

Answer

Date:   11 May 2001

Hello Ata,

Thanks for writing.

The holding period rules are based on the period that you hold the stock after exercising the option.

When there is a "substantial risk of forfeiture" of the stock (it’s not vested) and it is not transferable, the stock is not considered to be received and the holding period doesn’t begin until the restrictions lapse.

Also, the holding period can be suspended or lost when the taxpayer acquires certain stock options, such as a buying a put, for the stock.

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.