Jul. 28th, 2005 @ 12:18 pm
So, I have a reasonable chunk of stock options in HP... but none of them have EVER been worth anything. Well... they have potential worth, but right now, it would cost me more to wipe my ass with them than it costs me to just let them sit gathering dust (as if bits in a computer gather dust).
Well, for the first time in my life, my options have value... and with the stock hovering right between the feelings "It will go higher" and "It's worth it", I'm figuring I can sell what I want to sell and not feel too bad if it does go higher. Besides... it's a limit order... so I'm practically guaranteed to get at least what I consider to be a reasonable price for it.
So, for the first time in my life, I'm executing an options sale. It's exciting... essentially free money. I'm a little concerned about what it might do to me come tax time (I've heard some pretty major horror stories), but at the moment, it feels worth it... so I'm going for it.
Besides... if it does go up, I still have others vesting at a very similar price... so it's not like I'm giving it all up or anything.
But it's exciting to actually get something out of the options that I've essentially written off as a valuable retention tool.
Same day sale: (sale price - strike price) * number of shares = ordinary income. If you are feeling lucky, you can exercise as a purchase and hold. Then the gain is counted as AMT, and if it is less than the amount of income tax you'd pay that year, it doesn't incur any additional tax. You also reset the basis. A year later you can sell as a long term capital gain using the new basis price. This is how I and a lot of other people lost our shirts, as the stock took a dive and we ended up choking on worthless stock.
But cool for you! It's almost always the right choice to sell your options as soon they are worth something. Remember what Warren Buffet said: "I got rich by selling too soon."
The horror stories come from having to pay AMT. Basically it's a flat tax on unrealized gains from stock options. So if you exercise the option and hold, you'll have to pay tax on the expected profit. By exercising and immediately selling the option, you'll have zero AMT, and no horror story.
...I've been dealing with this obscene AMT for 3 years now. Sigh.
The Alternative Minimum Tax (AMT) is much more than that. It was intended to cover some 155 high net worth individuals who, in 1965, paid no income tax at all by contorting themselves according to every tax law passed by the Congress. This was deemed unacceptable, but rather than repealing all the tax incentives and credits that caused the problem in the first place, Congress passed the AMT instead, which is 26% ("How dare they follow our rules! Whack them with a new tax!").
Of course, none of the triggers are indexed to inflation, so it now catches millions
of tax payers now. It needs to be entirely repealed, and if the Congress is unhappy with the possibility that some people might pay no taxes on their incomes, it's time for them to repeal various tax credits and incentives.
Just some notes:
Taxes are owed quarterly. Your normal withholding from wages usually covers that, and a little. This is why you typically get a tax refund after filing your annual income tax return.
If you have sufficient additional income in any given quarter (e.g. from a stock sale), you will owe a quarterly payment - check with your accountant.
Oh, CA gets its cut, too.
From past experience:
The laws meant to punish the rich (who can afford to store everything offshore) will fuck you over no matter what you do.
DO consult with an accountant you trust.
If you decide to hold for the better tax rate, Murphy's Law dictates that the stock price will drop in an exponential rate to the potential savings.
So there are no surprises, I would set aside at least 50% for taxes. Don't try to figure out what it will be, you will underestimate and end up having to sell your body to write a very large check at the end of the year.
If you owed more than 10% of your tax liability for 2004, you will be required to pay at the end of the quarter you exercise (per the last post) to avoid penalties. If, however, you always get refunds or owe less than 10% of your tax liability, you are allowed one slip up. In which case, keep your tax money earning interest somewhere, and you'll pay the IRS on April 15, 2006 at 11:59 pm.
Of course, this is based upon my Yahoo stock options back in the day. I'd ask an accountant before you listen to anything anyone on the internets says. Laws may have changed, and your mileage may vary. Discount limited to inventory in stock. If this is an emergency, please hang up and dial 911. Call your doctor immediately if you get an erection that lasts more than 4 hours.