Legal Question in Tax Law in Massachusetts

Tax on Stock Incentives

I have stock options at a company. I have the option to purchase a certain number of shares at a certain price. But to purchase the options, I will need to buy and immediately sell some of the options to cover the cost of the transaction (which I know is ok to do). However, what are the tax options? I know that I will have to pay income tax on the stocks that I sell. Do I pay this when I sell them or in the next tax period when I report my income and file taxes. Also what about short-term capital gains tax? Is there a possibility I would have to pay twice (both income and short-term capital gains tax)?


Asked on 1/11/00, 12:21 pm

2 Answers from Attorneys
Stuart Williams

Re: Tax on Stock Incentives

Need more info than you've given to answer your questions! Please call me tomorrow (Wed.) after 10 AM and I will ask you for the relevant data.

(617) 527-0050.

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Answered on 1/18/00, 10:11 am
Walter LeVine Walter D. LeVine, Esq.

Re: Tax on Stock Incentives

The spread between the your option cost and the exercise price is taxed as a short-term gain (e.g., if the option price is $10 and the exercise cost is $20, you have a short-term gain of $10. However, the difference between the exercise price and the market value is taxed as long-term gain, if the options were held over 1 year. Both gains are taxed in the period they were received. So, if you exercise and sell in January, 2000, this becomes 2000 income, reportable in your 2000 return filed in April, 2001. However, if the gain is significant, you may be required to pay estimated taxes towards your 2000 tax to avoid underestimated penalties. The additional tax can be spread over 4 payments, commencing in April, 2000.

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Answered on 1/18/00, 4:16 pm


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