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Date:   19 Nov 1999
From:   Chadd

I do have one question of the holding period of ISOs. I read that ISOs will not be considered taxable income if they are held for two years after the grant date and one year after the exercise date. So does this mean that I have to buy the stocks first after two years and then wait one more year before I can sell them? Or can I perform a cashless exercise after two years of the grant date?

Just a little confused here.

Thanks,

Chadd

Answer

Hello Chadd,

I think you are confused big time.

You should request our report, "Incentive Stock Options - Executive Tax and Financial Planning Strategies."

ISOs do not result in taxable income when they are received or exercised. Generally, when the stock is held more than two years after grant and more than one year after exercise, the gain on the stock when it is sold qualifies as a long-term capital gain.

When the option is exercised, a tax preference results that must be added to other taxable income in computing the Alternative Minimum Tax (AMT), so a tax may result even though you have no cash to pay it. A part of the AMT will be available as a tax credit to reduce your future regular tax liability.

See the report for more details.

I highly recommend you consult with a tax advisor who is familiar with these issues.

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.