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Date:   Wed, 18 Aug 1999
From:   Srinivasa

What is the tax rate for long term capital gains on incentive stock options if the stock is sold,

1. One year after exercising the stock
2. Before two years after the grant

I understand that the difference between the Fair market value on the date of exercise and exercise price is considered ordinary income. What is the tax rate on the rest of the income (Long term capital gain). I heard it is 20% (from 1998 onwards). Is it true?

Thanks in advance.

Srinivasa

Answer

Hello Srinivasa,

Yes. If stock acquired using an ISO is sold more than one year after exercising the option and less than two years after grant, the gain up to the amount of the spread at exercise is ordinary income and the excess is long-term capital gain, eligible for the 20% maximum tax rate.

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.