How to Cash Stock Options Without Paying Tax
Public corporations often offer stock options as an incentive to employees. The option lets employees purchase company stock at some point during the option period, which might be up to 10 years. When you buy the stock, you have exercised your option. Taxes apply upon the sale of the stock based on the spread. The spread is the difference between what you paid and the amount for which it is sold. Avoiding taxes means eliminating the spread.
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Instructions
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Check what type of stock option you have. Incentive stock options immediately add the spread between the option value and the purchase price to ordinary income. Thus a $5 option exercised at $6 per share for 100 shares is $600 in added income. Nonqualified options wait until you sell the optioned stock before taxing.
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Exercise the nonqualified option with an immediate order to sell the stock at the same time. As long as the spread remains at zero, there is no net tax effect to you.
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Exercise nonqualified options and hold them. If the market drops and you sell the stock for a lower price than the amount for which you purchased it, you will get a capital loss to reduce other taxes. Capital losses are based on your exercise price, not the option price.
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Transfer nonqualfiied options to children or family members if your company permits. A person in a zero tax bracket exercising options might have no net income generated on the sale.
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Hold exercised options for at least a year before cashing them in. While this won't eliminate taxes, it reduces the taxes to the long-term capital gain rate, lower than most income tax brackets.
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Tips & Warnings
Exercising and selling options without any tax means you are performing a transaction for no net financial effect. The purpose of the stock option is to give employees an incentive to see the stock price go up and participate in the appreciation of the stock. Look at your overall financial scenario and speak with a tax adviser regarding the best way to approach exercising and liquidating stock options to see profit but reduce overall tax liabilities.
