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Jan 9, 2009 
QUESTION: This year I exercised my stock options at my company. I had 300 shares at $15. I purchased 50 and sold the rest. What are the tax implications and at what percent will I be taxed?
MARY BETH FRANKLIN ANSWERS: First, it is important to determine what type of stock options you have.
Non-qualified stock options (NQSO) are typically given to rank and file employees. The difference between the option price or "strike" price and the fair market value of the shares on the day you exercise your option is called the spread, and you are taxed on that amount at your ordinary tax rate. So if your strike price is $15 a share and the market price is $20 a share, you will be taxed on the $5-a-share spread at your ordinary tax rates.
If you sell the shares immediately, and there is no capital gain, there would be no additional tax owed. If you sell some of the shares later but before one year has elapsed, your gain would be taxed as ordinary income. If you hold on to the shares for more than one year and then sell them, your gain would be taxed at the capital gains rate, currently a maximum of 15%.
However, if you have incentive stock options, typically reserved for executives, the tax laws are different. Under the regular tax code, there is no immediate tax on the spread between your strike price and the fair market value of the shares when you exercise your option. However, that spread or "bargain element" may be subject to the alternative minimum tax, even if the value later declines. However, if you sell the shares before the year is over, that is considered a "disqualifying event". You will not owe any AMT, but you will owe ordinary income taxes on the difference between your strike price and the sale price.
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