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Date:   Thu, 9 Dec 1999
From:   Mike

My understanding of NQO is:

1. If exercised and sold immediately - you pay ordinary income tax on the difference between the grant price and the sale price.



2. If you purchase the stock at the grant price - you pay ordinary income tax on the difference between grant and the value at purchase but this resets the purchase value so that if you hold for one year, you pay capital gains on the difference between the value at purchase and whatever the one year later selling price is.

Some people have suggested that if you purchase the stock at the grant price - and hold for one year - then the entire amount between the grant price and the final selling price is at capital gains.

Which is correct?

Mike

Answer

Date:   19 Dec 1999

Hello Michael,

Please request a copy of our report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

Generally, you report ordinary income at the time you exercise the options based on the spread between the fair market value of the stock at exercise and the option price.

Your tax basis for the shares is the fair market value at exercise.

Perhaps the people you talked to were confusing Non-Qualified Stock Options with Incentive Stock Options.

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.