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Tax Strategies For Stock Options
Many employers are using stock options as a way of providing equity compensation to employees. This is mostly true for corporations. Stock options are of two types -- qualified incentive stock options and nonqualified stock options. |
Qualified incentive stock options have tax benefits but end up having complicated tax consequences. On the other hand nonqualified stock options have a disadvantage associated with them which involved the reporting of taxable income when the option is exercised. However, the income is taxes as ordinary income and not as long term capital gains.
This disadvantage is not there with qualified incentive stock options as there is usually no income to report at the time of exercising the option unless you sell the stock options at the same time as you exercise it. However, qualified incentive stock options get the long term capital gain treatment for the appreciation that occurs above the exercised price if they are held for a specific period of time.
However, you can minimize the taxes to certain extent for both qualified incentive stock options and nonqualified stock options. You can avoid paying the alternative minimum tax on the difference between the stock price and the strike price by exercising your qualified incentive stock options when the stock price is close to the exercise price. You can use the same tactics and strategy for nonqualified stock options.
If you want to ensure that the long term capital gains rate applies to a sale of a stock option that you need to buy puts and sell calls that overlap the strike price. You then use the money from the sale of calls to purchase puts. This way you end up locking the stock price and allowing yourself to hold on to the stock until you qualify for long term capital gains.
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