Ways to Reduce Stock Option Taxes

If you hold employee stock options or restricted shares in a private company funded by institutional venture capital, feel free to contact us at the Employee Stock Option Fund for more information on how we can assist you. By doing so, you can not only avoid the risks associated with investing directly in a startup but possibly improve your taxes as well. For specific tax related support related to stock option exercises, please contact Scott Chou.

© 2012-2017 Employee Stock Option Fund. All Rights Reserved. The ESO Fund does not provide legal, financial, or tax advice.

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May 2, 2017

3 comment

NSO Tax Treatment Strategy | Tax Consequences When Exercising Stock Options | ESO FUND
May 31, 2017 at 12:36 am

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[…] The Alternative Minimum Tax (AMT) can apply to current and former employees of privately held companies when they exercise their incentive stock options (ISOs) if the fair market value is higher than the exercise price. The AMT can have a significant cash impact on those who exercise their ISOs. See this page for more information on how to calculate AMT. Holders of non-qualified stock options (NSOs) are subject to tax at exercise if the fair market value of the stock is higher than the exercise price (“spread”). If you leave a company and negotiate an extension on your exercise period that is longer than 90 days after your final day of employment, then your ISOs will become non-qualified stock options. NSOs are more typically associated with non-employees such as contractors and outside business partners. Moreover, employers are required to withhold at least 25% of the spread at the time of the exercise. This withholding includes federal, medicare, FICA, and applicable state income taxes. Since the cost of exercising stock options could already be very high, the addition of taxes makes the entire investment more burdensome as well as risky. A solution for reducing this is risk is obtaining an advance from the ESO Fund to cover the entire cost of exercising your stock options, including the tax. An indirect benefit of letting ESO finance your option exercise is getting a disqualifying disposition that can eliminate much if not all of the AMT and reduce your overall tax liability. Conceptually, ESO is buying your stock after you exercise but paying you in installments. The initial installment just covers your cost of exercising and taxes and the final installment will be at final liquidity and based on the valuation at that time. Since the final installment has an open ended value, it is as if you now have new stock options with unlimited upside potential, no expiration date, and little or no tax liability to achieve this. In summary, an ESO transaction will reduce your tax burden by deferring most of it until final liquidity, eliminating your risk by covering your exercise and taxes, and still leaving future upside on the table. It’s like having your cake and eating it too! The main catch is that your ESO transaction must occur during the same tax year in order to qualify for an AMT disqualifying disposition. Click here for a summary of other methods for reducing taxes associated with exercising options. […]

So, you want to save on taxes when exercising options? – ESO FUND May 31, 2017 at 9:11 am

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[…] be burdensome for many individuals. Where to get the funds? How much risk to take? Look here for a summary of other ways to save money on stock option taxes. The ESO Fund can help alleviate these risks by providing the funds to exercise stock options and […]

The 83(b) election helps you reduce taxes for stock options and restricted stock units (RSUs) – ESO FUND
May 31, 2017 at 9:19 am

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[…] require a lot of capital and yet the time to liquidity for your company can be quite long. Follow this link for a summary of other ways to reduce your stock option taxes. As your shares are vested, you may be tempted to sell some shares to recover your original […]

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