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Extra info for 10 Minute Guide To Employee Stock Option Purchase Plans
If you want to hold the stock, this date establishes the "basis" for the stock when computing future tax liabilities. " ) Caution Remember your option agreement guarantees a certain price you will pay for the stock. It does not guarantee the fair market price at the time you exercise. I l@ve RuBoard I l@ve RuBoard Which Options to Exercise Your company may grant employee stock options on a regular schedule, such as every year or every six months. It is possible that you will have more than one grant available for exercise.
You own nonstatutory stock options. You must pay ordinary income tax on the spread between the grant price and the fair market price of the stock on the day you exercise your options. Once that burden is behind you, there are no more tax liabilities until you sell the stock. If you hold the stock for more than one year, it qualifies for long-term capital gain tax. If you believe the stock is going to continue to grow, it may make sense to pay ordinary income tax on the spread when it is small rather than waiting years, then facing a large ordinary tax liability when you exercise in the future.
In Example 1, you could be liable for ordinary income tax on the difference between the grant price and the fair market value of the stock at disposition: In Example 2, your liability would be capital gains tax on the difference between the grant price and the fair market value of the stock at disposition: Meeting the holding period requirement saves you $588 in tax ($1,188 - $600 = $588). Another way to look at it is, violating the holding period requirement will cost you almost one-half of your profit.