Professor Cook Answers More Tax Questions

Professor Cook's answer to tax question was published by USA Today.

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Q: How do I account for stock options received from my employer that I have held for quite awhile? I exercised the options and simultaneously sold the options for gain.

A: The timing and computation of tax consequences of stock options is dependent on a number of variables, the first of which is the type of stock option — statutory or nonstatutory. In general, incentive stock option plans (which it appears from your question to be the type you received) or employee stock purchase plans, are considered statutory. Your employer would have informed you of the nature of your plan. In such cases, there is no taxable income in the year the option is granted. In addition, although there is no regular tax on the exercise of the option, there can be alternative minimum tax consequences. In the situation you described, exercising and selling in the same tax year, there should be no AMT issue related to the exercise.

There is taxable income in the year of sale — the difference between the selling price and the option price. If you satisfy the holding period, that gain is a capital gain; if you do not, you may have both ordinary income and capital gain. Generally, the holding period is satisfied if you do not sell the stock until the end of the latter of one year after the option is exercised or two years after the option is granted. It appears that you do not satisfy the holding period and that the income (fair market value on date of exercise less option price) would be ordinary reported as wages on line 7 of Form 1040. Consult your tax professional for more specific guidance. —Ellen Cook, assistant vice president for academic affairs at the University of Louisiana at Lafayette.