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You pay the strike price, and you pay taxes on the difference between the current stock value and the strike price.

For example, if the shares would have been worth $1,000 when you joined the company, then the strike price for the options is $1,000. If those shares would be worth $10,000 at the time you exercise, then you pay $1,000 to the company to receive the stock, and then you pay taxes on $9,000 (the difference) to the government. So you might be looking at like 3K in taxes in that case.

You owe the taxes for the current tax year. You owe the taxes regardless of whether or not the company succeeds. Company could fold right after you exercise and you'd still owe Uncle Sam 3 grand.

(Then there are also capital gains taxes to worry about after this. I am only describing your immediate tax burden.)




I was under the impression you only pay taxes if you trigger the AMT. If you do not trigger the AMT then you will just pay your ordinary income taxes on salary. Is that not the case?


Good question. Our lawyer has suggested that anyone exercising options should be prepared to pay taxes on the difference, but it would be interesting to know if you can avoid it if your other income is low.


But, with NSOs, if you file an 83(b), you avoid tax, correct?


83b only avoids future capital gains tax, not tax on the shares being acquired at the time of exercise. In my above example, an 83b doesn't save you from having to pay taxes on the 9K value difference, because that's not considered a capital gain.

The only way to not be taxed at the time of exercise is if the share price hasn't changed since you joined the company.


if the company tanks right after you exercise, can't you deduct the losses?


This happened to a lot of people in the Valley after the dot com bust. They exercised their options, triggering a tax liability, and then the shares tanked, leaving them with no money to pay off the liability. They could only deduct $3000/year. Lots of people were in a lot of trouble, but I remember hearing that finally the IRS made a change so that this wouldn't affect you anymore.


You should be able to deduct the loss, but I'm not sure how that plays with the tax owed, since the loss is a capital loss and you're paying tax on an object of specific value (not a capital gain). It might not simply cancel out.




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