Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: sal99 who wrote (121756)	7/18/2002 5:05:00 PM
From: Art Bechhoefer	Read Replies (3) \| Respond to of 152472

>> employees are subject to regular earned income tax rates for the difference between the option cost and the market price at exercise<< sal, this seems a little confusing. The employee is granted an option for, say 100 shares at a price of 25. The stock is at 30 (these are all prices for illustration only). The employee is in no hurry to exercise the options, since the stock price is hardly any different from the option price. A year passes, and now the stock price is 50, but the employee still has the right to purchase at 25. When that purchase goes through, the company should report the $25/share difference between the option price and stock price as an expense. A year later, the employee decides to take a profit in the shares, making $25 (or possibly more) for each share. The profit on the sale rightly should be reported as capital gain. If the time between purchase and sale of the stock that was obtained through the exercise of options is greater than a year, then the capital gain should be subject to a preferential rate. Art

To: sal99 who wrote (121756)	7/19/2002 12:11:41 AM
From: JGoren	Read Replies (1) \| Respond to of 152472

I am trying to understand the tax on options from what has been posted and frankly am having trouble. This is my understanding of the tax treatment of nonqualified plan stock options. Typical employee stock options are granted at or a little above the current market price on the date of grant, that is, the market price is 20, the option is granted at 20, exerciseable over a 5 year period, with 20% becoming exerciseable one year after grant. Generally, the employee waits until just before expiration to exercise. So, if the stock price is 40 when the employee exercises a nonqualified option, he has ordinary income of 20 dollars per share. This is why most employees immediately sell their shares--they have to pay the taxes. If, however, the employee actually exercises the option and retains shares, then it becomes subject to capital gains treatment--long or short term thereafter when he sells the shares. In other words, after exercise, he is treated just like any other investor.