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Date:   Tue, 27 Apr 2004
From:   Paul

Hi Michael,

I exercised employee stock options for approximately 73,000 shares in two different transactions over two days during December, 2003.

The person who is preparing my income tax returns for 2003 says that I will need to pay ordinary income tax on the gross proceeds from these transactions and capital gains taxes on top of that. This would amount to 75% of what I made from the transactions. She says that I actually did own the stock while the options were executed.

What is your take on this?

Thank you,
Paul

Answer

Date:   Mon, 03 May 2004

Hello Paul,

Your tax return preparer should be aware that you receive a basis (cost for reporting tax gain or loss) adjustment addition for the ordinary income reported relating to exercising your options. (It sounds like you made same day sales.) When you add the ordinary income to the option price paid for the stock, it should result in eliminating virtually all of the capital gains for the sales.

Maybe its time to upgrade your choice for tax return preparation.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.