When to Exercise Your Stock Options

Employee commodity can offer you with a considerable way to obtain deferred income and invite one to control the recognition of taxable income. You generally pay no tax when a choice is granted as you aren't receiving any shares of stock, only the choice to get shares at a later time.

In general, holding a choice to obtain stock could be much better than holding the stock itself. The choice provides protection against loss if the value of the stock decline below the exercise price. Furthermore, the option provides holder equivalent ownership rights in the organization, without requiring any immediate investment. Employee commodity provide potential to possess post-exercise stock growth taxed as capital gains instead of ordinary income. This gives an advantage for individuals who are in the very best tax brackets

Know the Difference

Nonqualified COMMODITY (NSOs) give a worker the option to get corporate stock at a specified, fixed price (usually at fair market value at that time the choice is granted). Generally, you must exercise thooughly your substitute for buy inside a specified time period--typically 10 years or less.

Upon exercising your rights, any gain realized from the spread (the difference between your exercise price and the fair market value) is taxed as ordinary income. However, any gain realized from the date the choice exercised before date the stock comes is taxed as capital gain.

Incentive COMMODITY (ISOs) also provide substitute for purchase corporate stock at a collection price, but ISOs can't be issued having an exercise price below the existing fair market value of the stock.

Generally, the spread on ISOs isn't at the mercy of ordinary tax at that time you exercise the choice. However, spreads could be subject to the choice minimum tax (check with your GROCO financial adviser to learn more). Gain realized upon the sale of the ISO stock could be taxed as capital gain. Provided you have held the ISO stock for a minumum of one year from the date of exercise and at the very least 2 yrs from the date the choice was granted, the complete gain recognized upon sale of the stock is taxed as a long-term capital gain.

When to EXERCISE THOOUGHLY YOUR Options

The decision of when to exercise thooughly your options depends upon several factors plus your particular situation:

Your Company's Plan

Generally, options become exercisable over an interval of years. For instance, options granted in the business plan vest 20 percent per year over five years. It is important to know the facts of one's firm's plan before you decide.

Your Company's Growth

Understanding how your organization is poised for growth is another essential aspect in your choice making process. Issues to examine and understand are:

Your Current Financial Needs

The decision to exercise should think about the necessity for cash, the proximity to the option's expiration and/or the existing stock value in comparison with its expected future value. Pertaining to ISOs, due to taxes, the mandatory holding periods is highly recommended when determining when to exercise your options and/or sell the underlying stock.

Balancing Your Portfolio

You could also elect to exercise a choice if your company's stock represents a big part of your investment portfolio and you also desire to diversify your holdings. Some professionals tell reduce investment risk, company stock shouldn't represent a lot more than 40 percent of one's portfolio.

Market Conditions

Obviously, market conditions will play a big role in your choice to exercise thooughly your option. If the stock underlying the choice appreciates, you might wish to retain options provided that possible to be able to benefit from future gains.

Tax Ramifications

In the case of NSOs, you might want to consider exercising your option over a couple of years to avoid having right into a higher tax bracket. Remember, the spread on NSOs is at the mercy of regular tax during exercise. Because appreciation occurring before exercise is taxed as ordinary income, it could be beneficial to exercise as time passes.