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Date:   Tue, 09 Jan 2007
From:   Sandee

I purchased 900 shares of stock by exercising a non-qualified stock option at work. The option price was $33.45 per share and the fair market value on the exercise date was $44.55 per share. I have to hold the stock for five years, and did not file a Section 83(b) election. How will the income be taxed?

Answer

Date:   Wed, 31 Jan 2007

Hello Sandee,

You need to confirm with your employer that the shares will not be treated as vested until the five-year period has passed.

If that is the case, the excess of the fair market value over the option price on the vesting date will be taxable as ordinary compensation income.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified 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.