- How to Use a Stock Swap to Exercise Employee Stock Options
- ISO Exercise Using Stock
- Using Stock To Exercise Options - FindLaw
Since the bargain element not claimed as ordinary income, it has no adjustment to that cost basis of the new shares. If we assume you do a stock swap of 6,555 long-only shares that have a cost basis of $75 per share, the cost basis of your retained ISO shares will look like this:
How to Use a Stock Swap to Exercise Employee Stock Options
The true advantage for a stock-for-stock option exercise is in not having to obtain cash to exercise the option. If it is necessary to sell stock in order to exercise a stock option, a capital gains tax will be imposed on the sale of that stock. However, by trading old stock for new stock in a stock-for-stock option, the capital gains tax can be deferred. Eventually, a capital gains tax will be imposed when the stock is sold, but the timing of the sale can be planned for minimal tax consequences.
ISO Exercise Using Stock
First we 8767 ll look at the regular income tax consequences when you use stock (other than immature ISO stock) to exercise an incentive stock option:
Using Stock To Exercise Options - FindLaw
This section lays out the tax consequences when you use shares other than immature ISO stock to pay the purchase price to exercise an incentive stock option.
The remaining 9,555 shares here, however, have a cost basis of $5/share (which is different than in the NQSO example above).
Here are the regular income tax consequences when you use immature ISO stock to exercise an incentive stock option:
This is because these shares often have different tax rules subject to holding period requirements. These requirements and subsequent tax rules can make using shares received through an ESPP and ISOs in a stock swap more complicated than other methods.
Let’s also assume that you want to exercise the following employee stock options or ESOs. For the sake of this immediate example, we will not distinguish between non-qualified stock options and incentive stock options (but we will cover each later in the article).
Prior to the stock swap, you had owned 65,555 long-only shares and the option to purchase 5,555 shares from the ESO. You “controlled” 65,555 shares.
Keep in mind that when you early exercise, you’re more likely to trigger the $655K rule. This prevents you from treating more than $655K worth of exercisable options as incentive stock options in a year—any options above that amount are treated as NSOs for tax purposes.
With this transaction, which is only available from Fidelity if your stock option plan is managed by Fidelity, you may exercise your stock option to buy your company stock and sell the acquired shares at the same time without using your own cash.