Options Trading Tutorial

Is it better to surrender or Exercise stock options?

If you have stock options at the company where you work and that company gets acquired you have two choices. You can either surrender your options and take a cash payout or you can exercise your options and still take the same payout but aparently there are different tax implications for each case. What are the differences? Is it better to do one or the other?

Public Comments

1. Short answer, take the money, claim it as income, pay the taxes. It's all taxed at ordinary income rates. If you have ISO options (incentive stock options), you can go ahead and get the stock, but if you have a large amount, you can trigger AMT on the phantome income (the amount you would have gotten if you cashed out) and have to pay additional taxes now. (Then you get to take AMT credits to get the extra tax refunded a little at a time in future years.) If you can hold onto the stock for more than a year and it goes up in value, you can pay the long term rate (max 15%), rather than the ordinary rate (max like 35%). If you have employee stock options, you will pay ordinary income on the 15% discount which many plans have when you sell the stock and the rest could be eligible for LTCG rates. See IRS publication 525 and the AMT form 6251.