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Tips for Exercising Your Stock Options

by Marquette Turner Luxury Homes

in Features, Money & Business, Variety

Stock options are a great way for companies to compensate employees for staying with the organization for a longer period of time. However, many employees don’t have a strategy for exercising their options, which could be problematic when tax time comes around. If you are new to stock options, learning about what they are and tips for exercising your stock options can help you best set yourself up for the future.

What Are Stock Options?

stock option is a contract that gives a buyer the right to buy or sell an option at a specific strike price by a specified date. Companies commonly issue stock options as a form of compensation for employees. When they do this, they aren’t giving you stock outright. They’re just giving you the right to buy their stock at a specific price. You are typically required to maintain your employment with the company for a certain amount of time to obtain all of the stock options the company is issuing.

What Does Exercising Stock Options Mean?

Image via Flickr by CreditDebitPro

Exercising stock options refers to purchasing or selling an underlying security at the grant price, the price set by the option. If you are exercising your right to purchase company stock, it means you are buying the stock at the options price. You earn the right to exercise in a process called vesting, which companies use to encourage employees to stay with the organization longer. You will be required to stay with the company for a certain number of years to be fully vested in your stock options.

Consider the Tax Implications

If you exercise your option sooner rather than later, you improve the likelihood that you will benefit from long-term capital gain tax treatment when you sell. If the options are non-qualified stock options, these do not qualify for special income tax treatment. Exercising and holding these shares for over a year means you would qualify for the 15% or 20% long-term capital gains rate. If you sell in under a year, your post-exercise gains are taxed at the usual rate, which could be up to 37%.

If you have incentive stock options, you have to wait and sell your shares more than two years after the option grant date and own them for over a year. If you take this approach, your profit will be taxed no more than 15% or 20%.

Pay Attention to the Vesting Schedule

Typically vesting occurs over a number of years, often four, with a portion of the shares vesting each year. It’s important to plan ahead and pay attention to the options you are vested each year so you can plan how you want to exercise your options each year.

The most crucial part of exercising your stock options is to have a plan. By understanding the tax implications and familiarizing yourself with the vesting schedule, you can better understand the share amounts that could be coming your way and plan for how you will buy them and sell them. With careful planning, you can make the most of your options and set yourself up for the future.

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