Should i exercise and hold stock options

Should an Investor Hold or Exercise an Option?

 

should i exercise and hold stock options

Mar 13,  · Do you have employee stock options that you're not quite sure what to do with? Should you exercise them and take the gain now (if there's no gain, it's a moot point) or hold Author: Erik Carter. Some articles say you should hold onto your employee stock options as long as possible. Don't exercise them until they're near their expiration dates. In theory, at least, this gives the stock an opportunity for additional price appreciation. There are three main strategies you can take when you exercise your stock options: 1. Cash for stock: Exercise-and-Hold. 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).


When Should You Exercise Your Stock Options? - Wealthfront


Startup Law Resources Venture Capital, Financing Exercising stock options can be complicated and result in significant financial consequences.

Here are some of the various strategies and tactics to consider. Stock options can be confusing to new employees receiving them, and even some employers offering them. For example, some people do not realize that a employee stock option has no real value until it is exercised. In this article, we take a look at stock options: what they are, how they are exercised, their tax implications, and more. Keep in mind that exercising stock options can be complicated, and result in significant financial and tax consequences.

It is highly recommended, therefore, that you consult with an attorney, accountant, should i exercise and hold stock options, or other experienced tax professional before exercising any stock option. What Is a Stock Option? Note that a stock option is a right, not an obligation, to purchase the stock, meaning that the option holder may choose to not exercise the option.

As mentioned above, employee stock options have become a popular benefit given to new and valuable employees as an incentive to join a company and work hard to make the company a success. Exercising a stock option means purchasing the shares of stock per the stock option agreement. The benefit of the option to the option holder comes when the grant price is lower than the market value of the stock at the time the option is exercised.

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. What is Vesting? A vesting date is a common feature of stock options granted as part of an employee compensation package. What is the Option Expiration Date? 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.

And they may be right, under most should i exercise and hold stock options. There are times, however, when exercising your options early is a good idea.

You currently own, or hold options on, should i exercise and hold stock options, too many shares of company stock than is healthy for your overall investment portfolio. You believe the stock is a should i exercise and hold stock options 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.

Cash for stock: Exercise-and-Hold You purchase your option shares with cash and hold onto them. This gives you the maximum investment in company stock, should i exercise and hold stock options, 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. Cashless: Exercise-and-Sell 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. Cashless: Exercise-and-Sell-to-Cover 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. Stock Swaps: 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 Considerations in Exercising Stock Options 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, should i exercise and hold stock options. Always consider consulting with a tax expert before exercising any stock option.

Options granted through an employee stock purchase plan or incentive stock option ISO plan are considered statutory stock options. There are three main forms of taxes that must be considered when exercising an ISO: the alternative minimum tax AMTyour current income tax, and long-term capital gains tax. 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 exercise 5, options and purchase 5, shares. 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. Make sure that should i exercise and hold stock options understand all of the legal and tax implications involved before before exercising your stock options. You can begin the process by discussing your situation directly with the legal professionals on UpCounsel's marketplace.

UpCounsel gives you access to some of the nation's best lawyers from top law schools like Yale and Harvard. Get all the facts you need first, so you'll be in a position to make the best decisions about your financial future. Was this document helpful? Share it with your network!

 

When to Exercise Stock Options

 

should i exercise and hold stock options

 

Some articles say you should hold onto your employee stock options as long as possible. Don't exercise them until they're near their expiration dates. In theory, at least, this gives the stock an opportunity for additional price appreciation. Consider a stock swap. Another method of exercising options without a cash outlay is to swap currently owned shares and use the proceeds to finance the exercise of the options. This exchange can often be done directly with the employer company itself, but only if you own adequate amounts of stock independent of your incentive options. Your stock option loses its option value the moment you exercise because you no longer have flexibility around when and if you should exercise. As a result many people wonder when does it make sense to exercise an option. Tax Rates Drive the Decision to Exercise.