How can I reduce the taxes on my incentive stock options?

October 16, 2000

Subject:   ISOs, Stock Grants and 83b
Date:   Wed, 13 Sep 2000
From:   David

Dear Mr. Gray,

Your website is a tremendous resource. I wonder if you could help with a question.

I am being hired by a start-up company. They are granting me XXXX incentive stock options priced at $0.0Y per share (today’s value). The options will vest on a monthly basis over the next 48 months. There is an acceleration clause which allow the full package to vest if there is a change of control in the company. I think that the company’s potential is enormous and believe that my options will be worth many times more than the current $0.0Y in the near future.

I would like to minimize the tax bite from these options. My thoughts are:

  1. To request that the company grant stock rather than options. The advantage to me, I think, is that in 12 months, I will only have capital gains with which to deal, not ordinary income. The disadvantage to the company is that they have no recourse if our agreement ends before the full 4-year vesting period.

    OR

  2. To leave the vesting program as is, but to use an 83b election to have the capital gains clock begin ticking now. Does that make sense? I’m not fully conversant in the 83b election workings, but I wonder if it helps to avoid paying ordinary income tax on the large gains that I anticipate in the value of the stock.

If you have any other ideas, I would be greatly appreciative.

Thanks.

David

Answer

Date:   11 Oct 2000

Hello David,

A Section 83(b) election will have no effect before an option is exercised, and has no effect at all for regular tax reporting.

The advantage of a stock grant is there is no tax preference for AMT. The company can still have a vesting schedule for a stock grant and could require you to surrender the shares before the 4-year vesting period has elapsed. You should consider making a Section 83(b) election for alternative minimum tax reporting if you choose this alternative, but be sure you can fund paying the tax based on the value of the stock at the grant date.

Good luck!

Mike Gray

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

Comments are closed.