Can a company withhold shares to pay the taxes?

July 27, 2001

Date:   Mon, 9 Apr 2001
From:   Bruce

A follow on to the stock swap NQSO exercise FAQ answer – so there are 90 new shares and 10 replacement shares – do the 10 replacement shares get kept by the company as payment for the exercise? If you also have them withhold shares to pay the tax withholding, do you record this as a sale of X shares from the specified lot of 90 new shares?

Thanks, Bruce


Date:   Wed, 25 Jul 2001

Hello Bruce,

I have so many FAQs, I’m not sure which one you are referring to.

If 10 previously owned shares are exchanged to exercise an option for 100 shares, the employer may either take the certificate for the 10 shares and issue a new certificate for 100 shares, or just have the employee document already owning the 10 shares and issue a certificate for 90 additional shares.

The employee generally pays cash for the withholding taxes.

For a cashless exercise, some of the shares will have to be sold to get the cash to pay the taxes, resulting in reporting some taxable income.

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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