How is tax basis determined for incentive stock options?
November 29, 2004
Subject: ISO Swaps / Basis Issues
Date: Wed, 20 Oct 2004
I am puzzling over your explanation of how tax basis is determined for shares received by exercising an ISO paid for with a swap of company stock. Why do you say the “spread” is taxed as compensation? (From a CPA.)
Date: Wed, 24 Nov 2004
Because, according to Internal Revenue Code Section 56(b)(3), the special rules for incentive stock options do not apply for the alternative minimum tax. That means the options are taxed as non-qualified stock options for AMT. From there, just research the regular tax rules for non-qualified stock options.