Options Trading Tutorial

If I exercised a big chunk of stock options in 2006, but did not sell anything, what are my tax liabilities?

I exercised hoping to start the clock for one year to get long term capital gains, but now fear a hefty AMT tax for 2006. Do I owe that if I never sold anything?

Public Comments

1. Nope. You're only taxed if you sell at a profit... hence the term capital gain.
2. You may well. That's a major AMT trigger. Taking the hit for short-term gains is often cheaper.
3. You may have some AMT liability - For that reason, if you are going to exercise and hold, its best to do it very early in the year. Then if the market tanks, you can sell before the end of year, and pay tax only on any actual realized gain. (However, the gain would be short term).