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Your option vests see below. You decide to exercise your option. As the owner of the shares, you now have the choice of selling them or holding them. A vesting date is a common feature of stock options granted as part of an employee compensation package. All stock options come with an expiration date, that is, the last date by which the option holder must exercise her option or lose it. Many people believe that it is wise to wait until just before the expiration date to exercise their stock options and purchase the option shares.
And they may be right, under most circumstances. There are times, however, when exercising your options early is a good idea. Here are four reasons to consider exercising your options before the expiration date:. You currently own, or hold options on, too many shares of company stock than is healthy for your overall investment portfolio. You believe the stock is a good investment for the long term and you want to buy as many shares as you can afford.
Your financial gain from exercising your options all at once would push you into a higher tax bracket, so you are spreading out your stock purchases under the option agreement. Remember that there are tax implications to exercising your stock options. More on tax considerations below.
You purchase your option shares with cash and hold onto them. This gives you the maximum investment in company stock, providing you with potential for gains from increases in stock value and payment of dividends if any. You may need to deposit cash into your brokerage account or borrow on margin to pay for your shares. You will also likely pay brokerage commissions, fees and taxes. You purchase your option shares and then and immediately sell them. In many cases, your brokerage will allow this transaction without using your own cash, with the proceeds from the stock sale covering the purchase price, as well as the commissions, fees and taxes associated with the transaction.
This choice provides you with cash in your pocket to put into other investments or use as you otherwise see fit. You exercise the option and then immediately sell just enough shares to cover the purchase price, commissions, fees and taxes.
Your resulting proceeds will remain in the form of company stock. A stock swap is another form of cashless stock option exercise. With a stock swap, you exchange company shares that you already own to pay for the shares obtained through the exercise of your stock option. The main benefit to this choice is avoidance of taxes. Keep in mind, however, that you must hold the shares used in the exchange for a stated period of time typically one or two years in order to avoid the transaction being treated as a sale and incurring tax costs.
Tax implications will play a key in role in your decisions on when and how to exercise your stock options. Remember, poor choices can have a devastating effect on your financial well being. Always consider consulting with a tax expert before exercising any stock option. The IRS recognizes two types of stock options: Options granted through an employee stock purchase plan or incentive stock option ISO plan are considered statutory stock options.
Tax Considerations for Incentive Stock Options. There are three main forms of taxes that must be considered when exercising an ISO: When you exercise your options and purchase your shares at a fair market value higher than the grant price, but do not immediately sell your shares, you will likely be required to pay a federal AMT, and possibly a state AMT. In regard to long-term capital gains taxes, consider that you will pay a more favorable long-term capital gains tax rate if you exercise your options, hold the shares for more than a year, and then sell your shares more than two years after the option grant date.
You then hold these shares for at least one year before selling them and pay taxes at the combined federal and state marginal long-term capital gains tax rate of The AMT will be credited against the taxes you owe when you sell your exercised stock earlier.
Alternatively, if you believe that your company's stock will appreciate rapidly, it may be worth exercising your stock options early and paying the higher tax rates.
The result may be to accumulate a great deal of wealth from owning a larger piece of a profitable company. There are many examples of employees at startups, like Instagram, who became millionaires overnight from their stock options alone. Just remember that stock options will expire after a period of time. Stock options have no value after they expire. Exercise your stock options to buy shares of your company stock and then hold the stock.
Depending on the type of the option, you may need to deposit cash or borrow on margin using other securities in your Fidelity Account as collateral to pay the option cost, brokerage commissions and any fees and taxes if you are approved for margin. Exercise your stock options to buy shares of your company stock, then sell just enough of the company shares at the same time to cover the stock option cost, taxes, and brokerage commissions and fees. The proceeds you receive from an exercise-and-sell-to-cover transaction will be shares of stock.
You may receive a residual amount in cash. 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.
The proceeds you receive from an exercise-and-sell transaction are equal to the fair market value of the stock minus the grant price and required tax withholding and brokerage commission and any fees your gain.
Know the expiration date for your stock options. Once they expire, they have no value. When your stock options vest on January 1, you decide to exercise your shares. You sell your shares at the current market value. If you had waited to sell your stock options for more than one year after the stock options were exercised and two years after the grant date, you would pay capital gains, rather than ordinary income, on the difference between grant price and the sale price.
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