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Subject:  Interested in stock option advice
Date:   Mon, 08 Aug 2005
From:   Ed

Hi Michael:

Our company will probably be sold before the end of this year. I had planned to realize capital gains when I exercised my stock options and later sold the stock. Now it looks like I will have ordinary income from cashing out the options relating to the buyout.

Some members of our board believe that, since the U.S. government wants to encourage the investment of capital, earnings from stock options can be reinvested and later qualify to be reported as long-term capital gains.

Are you aware of such an investment program?

Best regards,
Ed

Answer

Date:   Mon, 08 Aug 2005

Hello Ed,

Your board of directors appears to be fantasizing about how they wish the tax laws work according to the laws of logic. We are in a different world.

There are some diversification investment programs requiring transferring the stock received from exercising stock options, usually into a partnership. These are not available when your options are "cashed out".

The rules resulting in regular taxable income when an NQO is exercised or in AMT income when an ISO is exercised aren't defeated by these investment programs.

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.