What is the benefit of using stock swaps to fund non-qualified stock option exercises?

June 16, 2000

Date:   Tue, 30 May 2000
From:   Christopher

Hi Michael,

I struggle to see any logic for using stock swaps as a means to fund exercising NQSOs. The employee is simply creating an immediate tax liability with little or no change in the equity of a company. If one is confident about the company’s prospects, then do a “buy and hold” exercise strategy (either pay cash or borrow) and get LT cap. gains rates upon selling. Am I missing something about stock swaps? Are they more practical for ISOs?…



Date:   Wed, 7 June 2000

Hello Chris,

If the taxpayer would sell shares anyway in order to raise the funds to exercise an NQO, the swap can make sense.

No gain is recognized relating to the shares surrendered, so you get leverage by getting credit at the fair market value of the shares without paying tax for the exchange. The tax savings can also help in financing the exchange.

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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