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Date:   Tue, 07 Feb 2006
From:   Guy

Hello,

re: ISO stock swaps basis

I've used stock swaps for exercises for the past few years. The company has a stock replacement program for stocks used for the swap.

I've read your articles pertaining to the basis for regular tax calculation, and understand that the basis of the tendered shares carries over to an equivalent number of new shares, with a zero basis for the incremental shares.

What happens to the basis if these shares are used for another swap?

Thank you,
Guy

Answer

Date:   Wed, 08 Feb 2006

Hello Guy,

The shares shouldn't be used for another swap until the holding period requirements are met.

Assuming that is the case, the regular tax basis will be zero for all of the shares. (The basis for the exchanged shares was zero and continues to be zero for an equivalent number of shares after the exchange. The basis for the additional shares received is also zero.)

For AMT reporting, the tax basis of the shares is based on the fair market value on the exercise dates. This is consistent with the rules for non-qualified stock options for regular tax reporting. For example, assume 10 additional shares were received when the fair market value of the shares was $10 each. These shares are then exchanged (with no additional cash investment) to exercise an ISO for 100 shares when the fair market value of the shares is $100 each. The AMT tax basis for 10 shares is $10 each and for 90 shares is $100 each.

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.