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Technology Stocks : Compaq
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To: Gerald Drews who wrote (9727)11/26/1997 11:21:00 PM
From: Meathead  Read Replies (2) of 97611
 
Gerald - steve is most likely correct here. Are you referring
to employee stock options or market put/call options? They aren't
the same thing. I've been granted many options over the years
and they all seem to work the same way.

The difference between the grant and excercise price is treated
as ordinary income. You must pay income tax and social security
(up to the first 65k of your income) at the time of excercise
whether or not you buy them outright or sell them and take
the proceeds. You pay about one third in taxes no matter what.


Using steve's numbers here's a simplified example:

Strike: $25
Current: $100
Employees Income tax rate: 31%

Cost to acquire shares = strike + (gain $75 * .31)
$25 + Taxes of $23.25 = $48.25

Cashless transaction = Current - (strike + taxes)
$100 - $48.25 = Net profit of $51.75

I don't know of anyway to avoid the initial income tax conversion problem. I think most company plans work the same... I don't know, maybe not.

I'm sitting on a significant gain on one batch of options right now.
It would be great if I could buy them outright, sidestep the high
income tax rate somehow and convert them into assets to be sold at a later date taxed at the much lower cap gains rate. Is there some way to do this my company won't tell me about? If there is a way, I'd love to know...

MEATHEAD
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