1. The day you exercise, the IRS will tax you
income tax on the value between the stock's current value and your strike price. This is true even though you haven't made money from selling the stock yet.
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.
Math wise:
* 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
At exercise:
- You pay to exercise the shares: #S * TP
- You owe in taxes: #S * (EV - TP) * IT%
At sale
- You make: #S * (SP - TP)
- You owe in taxes, assuming you waited a year to sell: #S * (SP - EV) * CT%
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.
Math wise:
* 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
At exercise:
- You pay to exercise the shares: #S * TP
- You owe in taxes: #S * (EV - TP) * IT%
At sale
- You make: #S * (SP - TP)
- You owe in taxes, assuming you waited a year to sell: #S * (SP - EV) * CT%