Options Trading Tutorial

Very difficult Non Qualified stock option Problem?

If I have non-qualified stock options and I exercised them 1 year later and sold them 3 years later. What portions would be ordinary income and capital gain?

Public Comments

1. If you paid taxes when you exercised your stock options, then you owe on the gain since that time when you sell them. Otherwise, you owe on the whole amount.
2. The difference between the fair value and the price you paid for the shares are ordinary income. If you buy and hold for 1 year or more (doesnt matter if its 3, 4, 5), without any AMT consideration, if you sell you pay 15% on the profit of the shares. Isnt this the same question you already askedd?
3. IRS publications 525 and 551 cover this. 1.) you have reportable wage income to the extent that the exercise price of the option was below the actual price of the stock in the market when the option was granted. wage income, in this case, means that Social Security and Medicare taxes may also be due. [This was frequently the case in the recent scandals about backdating options for executives.] 2.) otherwise, [IRS calls this meeting the holding period tests -- there are two of them] a. you must have exercised at least one year after the date of the option grant [not known from the details you reported -- they count the actual days], and b. you must have held the shares for at least two years [they also count the days here] THEN (both 1 and 2), all of your gain or loss is Capital Gain otherwise, you have wage income to the extent the fair market price of the shares on the day you received them exceeds the option price you paid. [and again, SS/MediCare taxes may apply.] any gain above the wage income amount here is capital gain. if you sold at a loss, the entire loss is a capital loss. if you have wage income here, but not as much as the total gain, all of it is treated as wage income