How to Cash Stock Options Without Paying Tax
- 1). Check what type of stock option you have. Incentive stock options immediately add the spread between the option value and the purchase price to ordinary income. Thus a $5 option exercised at $6 per share for 100 shares is $600 in added income. Nonqualified options wait until you sell the optioned stock before taxing.
- 2). Exercise the nonqualified option with an immediate order to sell the stock at the same time. As long as the spread remains at zero, there is no net tax effect to you.
- 3). Exercise nonqualified options and hold them. If the market drops and you sell the stock for a lower price than the amount for which you purchased it, you will get a capital loss to reduce other taxes. Capital losses are based on your exercise price, not the option price.
- 4). Transfer nonqualfiied options to children or family members if your company permits. A person in a zero tax bracket exercising options might have no net income generated on the sale.
- 5). Hold exercised options for at least a year before cashing them in. While this won't eliminate taxes, it reduces the taxes to the long-term capital gain rate, lower than most income tax brackets.
