2. If the company is still private, the stock's value is determined by the last 409(A) valuation for Common stock that the company performed, assuming that your options are for Common stock (which is very likely). The company must perform one of these valuations a year and should provide you with that amount upon your request.
3. Exercising the stock starts the clock for long term capital gains treatement. That is, if you sell the stock a year after exercising it, you will pay capital gains tax on the value difference between the sell price and the value at exercise.
* TP = strike price (the price in your option contract at which you buy the shares)
* EV = value of a share at exercise time, as determined by the latest 409A valuation
* SP = sale price of a share when you sell the stock eventually
* #S = the number of shares you have
* IT% = Your income tax rate
* CT% = Your long term capital gains rate
- You pay to exercise the shares: #S * TP
- You owe in taxes: #S * (EV - TP) * IT%
- You make: #S * (SP - TP)
- You owe in taxes, assuming you waited a year to sell: #S * (SP - EV) * CT%
For incentive stock options (ISOs) #1 is not true and the earnings are not taxed as income. However, the earnings generated by your shares ((EV - TP) * #S) will be applied as an adjustment for the purposes of computing your alternative minimum tax (AMT).
Startup employees have ISOs, and are able to exercise them as ISOs until 90 days after they leave.
This is not necessarily true. I am a startup employee and I have NSOs.
In this case it seemed to be the case where one of the founders didn't know the difference when setting things up initially. After series A one of the investors pointed it out and new employees were given ISOs and old employees savvy enough to care were paid off.
edit: just to make sure I'm not crazy I dug out my option agreement and it's definitely NSO.
Condolences. That really sucks. :(
Is your tax deduction = #S * (EV - SP)?
This is equivalent to the standard: (Cost Basis - Sale Proceeds) calculation in a standard stock transaction.
Depending on whether this is a short term or long term loss, the following happens (taken from )
Short-term losses counterbalance those expensive short-term gains. What's left at the end of Part I of Form 8949 is the net short-term capital gain or loss. If there were no gains, then obviously the net would equal the total loss.
Long-term losses are applied to long-term gains. The result, at the end of Part II of Form 8949, is the net long-term capital gain or loss. Again, if you only have a loss, then the net is a negative number.
Next, you combine the short-term and long-term results on Schedule D. At this point, a loss in one section can offset a gain in the other section. For example, if you have a net short-term loss of $1,000 and a net long-term gain of $1,200, then you'll pay tax on only $200.
If there's still a loss, you can deduct up to $3,000 from other income.
If you had a really bad year and ended up with a net loss of more than $3,000, you can carry forward the leftover portion to next year's taxes. The unused loss can be applied to next year's gains, as well as up to $3,000 of earned income. A big loss can be used as a deduction indefinitely -- another important reason to keep good records.
Also the other thing that's screwed up about this is you pay taxes when you exercise the options at the normal income tax rate. But when you want to apply the tax deduction in the event of a loss, you're only allowed to do it on 'capital gains' for an unlimited amount and a max of $3000 on normal income. In fact it might be preferable to deduct it against normal income and keep rolling it over and just pay normal capital gains taxes (which is much lower than your income tax rate typically).
Pretty much. I have a $10K capital loss from a bad investment over 10 years ago. I simply keep rolling it forward until I have a capital gain to offset it.
Despite the parent comment, unrealized earnings on the exercise of ISOs are not taxed as income.