davejohnston

Hi, I'm trying to understand the tax implications of exercising and selling stock options. I work for a US company that issues employees NSO stock options. The company is not currently public, so the shares can't be sold on the public market, although there are private markets where individuals may purchase shares. Lets assume the following: Strike price (price I have to pay to exercise the option): $2 Fair market value: $5 income tax rate: 40% cap gains tax rate: 20% Scenario 1: Exercising options and holding the shares (pre-ipo) If I exercise 100 options, then I should declare and pay income tax on the difference between the strike price and the fair market value. i.e. the difference is $3, so I would pay 40% of (3x100) = $120 Is this correct? If not, how should I calculate the tax? Scenario 2: Exercising options and selling the shares (pre-ipo) In this scenario a private buyer is willing to pay $10 per share. I will use the money from the deal to cover the exercise cost. My understanding is I should work out income tax the same as scenario 1 i.e. 40% on the difference between the strike price and the fair market value i.e. 40% of (3x100) = $120 I then need work out capital gains by calculating 20% on the difference between the fair market value and what the private buyer paid i.e. $10-$5 = 5. 20% of (5*100) = $500 So in this case I pay a total of $620 in combined tax. Is this correct? If not, how should I calculate the tax? A few other related questions I have: a) in scenario 2, should I subtract the cost of the income tax from the gain, before calculating capital gains? b) in scenario 2 does it matter if this is treated as a single/same day transaction? Do I need to hold the shares for a while before selling them? Thanks for any advice you can offer