What are the penalties for not withholding tax at the time of exercise?

July 20, 2001

From:   Michael


I actually have two questions:

I have exercise some NQ options from my company in May and no tax was deducted. I kept the stocks and now I am facing the following:

I have a significant tax return to pay to the IRS, which mean that I will have to sell my stocks to pay for this return:

  1. since the price of the stocks have decline from $59 at the time of the exerise to $32 today, I assume that I will be able to declare a capital gain loss for my return in 2002,
  2. what are the penalties associated with the fact that no tax withholding was done at the time of the exercise.

Thank you for your response, I may need more help …



Date:   9 Feb 2001

Hello Michael,

  1. Yes, if you sell the stock for less than the fair market value on the exercise date, you will report a capital loss for the year of sale.
  2. Depending on your gross income and tax on your 1999 income tax returns and the amount of your withholding, there may be a minimal or no penalty. I suggest you refer to federal Form 2210 and the instructions for that form, and the equivalent for your state.

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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