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If I exercise stock options with a private company, what are the tax implications?

I have many stock options in a start-up at $.07/share. If I pay to exercise those, do I have to pay 2009 taxes (cap gains, I imagine?) on those? A recent fund-raising round went for $.50/share. So 1,000 shares x $0.07 = $70 to exercise. Then $0.50 - $0.07 = $0.43 x 1,000 shares = $430 x 25% tax bracket = $107.50 in taxes for every 1,000 shares I exercise. Do I have this right?

Public Comments

1. The math is right. However it's not considered a capital gain. It's considered compensation. Not only is it subject to your 25% marginal tax rate, but it's also subject to the employee share of FICA/Medi (7.65%). 430 x 32.65 = 140.40. Plus state tax if you have it. Also, frequently you have to come up with not only the 7 cents per share up front, but also the withholding taxes. Your HR should have data on that.