What are the tax consequences of ex-wife exercising warrants?
November 29, 2004
Date: Mon, 08 Nov 2004
My wife received warrants in a divorce settlement. The warrants are for a start-up company that hasn’t gone public. We believe her ex-husband received the warrants as part of an incentive plan. What are the tax consequences when she exercises the warrants?
Date: Wed, 24 Nov 2004
Based on what you have told me, the warrants will be taxed as non-qualified stock options. Your wife will be taxed on the excess of the fair market value over the option price as ordinary income when she exercises them. Her ex-husband may be subject to employment taxes at that time.
She should confirm the warrants were received relating to her ex- husband’s employment.
When to exercise them depends on the facts in the particular situation. If the company says the shares have significant value over the option price, I wouldn’t exercise them until the stock is publicly traded so that I could sell it to raise the cash to pay income taxes.