Exercising ISOs also may trigger alternative minimum tax (AMT). If you have more than $100,000 in ISOs vesting in one year (based on the market value at the time of grant), the amount over $100,000 is not eligible for special tax treatment. A disqualifying disposition below the original market value at the time of exercise would generate a capital loss with no ordinary income tax. If you disqualify when the market price is $50, then you would owe ordinary income tax on the original exercise spread of $3,000 ($30 x 100) and the remaining $10 per share would be treated as short-term or long-term capital gain, depending on how long you've held the stock after exercise. ![]() If you exercise 100 shares and later disqualify when the market price is $30, you would owe regular income tax on only $2,000 ($20 x 100). The tax owed will be based on the lesser of the spread (difference between the strike price and the market price of the shares) at the time of exercise or disposition.įor example, if the strike price is $10 and the market price is $40 at the time of exercise, the spread is $30. If you don't meet the holding requirements, you'll disqualify your ISOs and you will owe regular income tax in the year of the disqualifying disposition (the year you sell). (Your cost basis is equal to your strike price.) When you later sell the shares, the transaction is taxed at the long-term capital gains tax rate, which is more favorable than regular income tax rates. If you meet the holding period requirements, the ISO exercise is tax free for ordinary income tax purposes. To qualify for special tax treatment, you must hold shares from an ISO exercise for longer than: Generally, ISOs are eligible for special tax treatment and NQSOs aren't. The tax treatment of incentive stock options and non-qualified stock options is different. In most cases, you'll have 10 years from the date of grant before your options expire. This is the amount of time you have to exercise your options once they vest. Generally, you must hold options for a period of time before exercising them. The strike price for each grant won't change even if the price of the stock changes. Exercising means that you use your options to buy shares of company stock at the strike price. The strike price is the amount you'll pay for each share of stock when you exercise your options.
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