How will the ISO gain from a purchased company be taxed?

November 29, 2004

Date:   Mon, 11 Oct 2004
From:   Scott

Michael,

My wife’s company was just purchased by a Japanese company. When the deal closes early in 2005, all ISOs will immediately vest for all employees. The company will no longer be traded on a stock market. My wife has 3500 options that are not under water. The acquiring company has guaranteed a price of $27 per share at close. If my wife exercises and sells her option shares, she will have an estimated profit of $49,000. How will the gain be taxed?

Thanks for your insight,
Scott

Answer

Date:   Wed, 24 Nov 2004

Hello Scott,

Since your wife is exercising and selling her option shares at the same time, the gain will be taxed as additional compensation income and should be added to her W-2 wages. No withholding is required when you have a disqualifying disposition of ISO shares. You should consider getting professional help relating to whether any estimated tax payments should be made during 2005.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options – Executive Tax and Financial Planning Strategies.

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