How long must I hold exercised NQSOs to qualify them as long-term capital gains?

July 23, 2001

Subject:   NQ tax issues
Date:   Tue, 17 Oct 2000
From:   Cary


After what period of time can an exercised non-qualified share be sold and the gain be treated as a long term gain and not ordinary income? What happens if it is exersised in June of 2000 and sold in February 2001?

Thank you for your assistance.



Date:   4 Dec 2000

Hello Cary,

First, remember any excess of the fair market value of the stock over the option price at the date of exercise will be additional compensation as of that date. The tax basis (cost for computing gain or loss) of the stock is the fair market value as of the date of exercise.

The holding period of the stock will generally begin on the date of exercise.

In order to qualify for a long-term capital gain, you must hold the stock for more than one year.

Therefore, if you exercise an NQO during June, 2000 and sell the stock received during February, 2001, any gain will be a short-term capital gain.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, “Executive Tax and Financial Planning For Non-Qualified Stock Options”.

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