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Subject:   NQSO's and exercising them
Date:   Thu, 07 Oct 1999
From:   Taner

I have become confused after talking to a Financial planner and some of my friends as far as how NQSO's work.

Example scenario:

Company XXX, 1000 shares, strike price of $10/share, market price $30/share.

I was initially under the impression that I can pay $10,000 in order to exercise the NQSO's, while realizing the tax implications of a $20,000 price differential (taxed as regular income), and hold all 1,000 shares (don't sell them).

However, I was then told that this is not how NQSO's work, and instead I have to:

Do a same-day sale of the shares, coming back with $20,000 and realizing all tax, and then, optionally, purchase back shares at fair market value (so only about 650 shares - not counting tax).

Could you clarify this process, possibly? Thanks!

- Taner

Answer

Hello Taner,

Sorry I haven't written back to you sooner.

You are not required to sell stock received when you exercise a non-qualified stock option.

However, since you are required to pay the tax on the excess of the fair market value of the stock over the option price, it probably makes sense to sell them.

The decision to keep the shares is an investment decision.

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.