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Date:   Sat, 10 Jun 2000
From:   Kevin

Hi,

I did a cashless exercise of my stock options. (ie) I sold certain number of stocks to cover the cost of the option price plus tax for the entire stock. Now the stock price went down by 50%. Since I went to the last bracket of my income, I need to owe a large sum to IRS. Presently my stock price will cover mostly my tax. Since all my stock are only in papers and also I never enjoyed the stock benefits, I am feeling bad about this situation. Is there any way to avoid this situation?
Note : What about the withheld tax amount based on the FMV? Is there any way to recover this amount from the company or IRS? Is it good to sell the stock at this lower price and show it as loss with the IRS?

Please let me know your suggestions.

Thanks

Kevin

Answer

Date:   Mon, 12 Jun 2000

Hello Kevin,

Sorry, I can’t make your situation "all better."

We tell people to get professional help relating to these options for a reason. You really can owe a tax without having the money to pay it.

You can also convert taxable ordinary income to a currently non-deductible capital loss, as it appears you have.

The tax withheld for the exercise of your options will be a credit for your tax returns as part of your total tax withholding on Form W-2.

You might owe some additional tax, because employers withhold at the "bonus" rate.

If you sell the stock, you may claim the capital loss up to the amount of your capital gains plus $3,000. Any unused capital losses may be carried forward to future tax years.

If it appears the stock will continue to lose value, it might be best to "cut your losses" (stop the bleeding) and sell it.

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.