Recommend Our Site to Your Friends!

Print This Page

Date:   Sat, 22 Jul 2000
From:   Jeff

Hi Michael,

I had a quick question which may not have been addressed in your articles on the site:

If I (a) exercise a NQSO in a private company, (b) pay the ordinary income tax on the spread between my price and the FMV, and (c) the company goes out of business without ever becoming public, what happens?

Do I get to claim a capital loss of (X shares) * FMV, allowing me to eventually get the income tax back?

My situation:

• options at $1/share
• fair market value currently $19/share
• internet company hopes to ipo this year or early next
• company has a small but reasonable chance of failure

Cost for me with taxes is nearly $9/share, and if the company failed I'd like to be able to get most of the $9 back via writeoffs.

Thanks,

Jeff

Answer

Date:   28 Jul 2000

Hello Jeff,

In the event the company fails, you will probably have a capital loss based on the fair market value at the date of exercise.

As you probably know, deductions for capital losses are limited to the amount of capital gains plus $3,000.

There are definite risks involved in exercising stock options before an IPO. You hope the "upside" will far outweigh the risks.

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.