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Subject:   NSO
Date:   Tue, 07 May 2002
From:   Charlie

Hello.

After reading several of your articles, I am still confused on exercising NSO options. To lower my tax, I would like to exercise current shares with instructions to buy and hold with the intention of selling after one year.

Thanks for your help,

Charlie

Answer

Hello Charlie,

I’m sorry you are confused, because my material should be clear. There is no tax benefit for exercising non-qualified options and holding the shares. You will report ordinary income for the excess of the fair market value of the shares over the option price on the date of exercise. Your employer should require you to pay in the required income tax and employment tax withholding for the income. Your tax basis in the shares will equal the fair market value of the shares on the date of exercise (option price plus ordinary income reported.) Your employer should report the ordinary income amount as wages on your Form W-2 for the year of exercise.

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.