My Stock/Stock Option Scheme - Does this work?

[knick1959]

Thanks in advance for any advice offered. I understand that it's just advice.

I own some company stock from 8 years ago. I also have a handful of options that remain unexercised.

Due to an investor event, vesting on my options has accelerated ... let me use a round number - I have rights to "about" 1000 shares. This event requires me to exercise these AND keep or "instantly" sell them. There's another option where I don't do anything and just have the options purchased outright, but I've been advised that this is a hugely taxable event. I want to avoid this. Exercising first is tax advantageous, even if for a short time.

My thinking. I don't really want to invest MORE in this company; I have enough. However, I'll keep what I already own. What I REALLY want to do, though, is to buy-and-hold the new 1000 shares, then sell 1000 shares of my older, owned-for-8-years stock. I end up with the same amount of stock, but I will be taxed as a long term capital gain. Right?

The order of events will have me owning my current stock + 1000 shares for any least a short time. Then I will sell 1000 shares. Perhaps the same day, or within 2 weeks from the original transaction. The question is, do I get to pick WHICH 1000 shares I sell? Is it automatic that the oldest is considered sold first? Or will the IRS figure I'm setting my new 1000 shares?

 

[Matt]

My thinking. I don't really want to invest MORE in this company; I have enough. However, I'll keep what I already own. What I REALLY want to do, though, is to buy-and-hold the new 1000 shares, then sell all of my older, owned-for-8-years stock. I end up with the same amount of stock, but I will be taxed as a long term capital gain. Right?

The order of events will have me owning my current stock + 1000 shares for any least a short time. Then I will sell 1000 shares. Perhaps the same day, or within 2 weeks from the original transaction. The question is, do I get to pick WHICH 1000 shares I sell? Is it automatic that the oldest is considered sold first? Or will the IRS figure I'm setting my new 1000 shares?

You should be able to achieve this.

When selling shares you can elect 3 methods:

• FIFO
• LIFO
• Tax Lot Selecting

The latter allows you to cherry pick (though also LIFO may work here..) however you will have to make sure that the BROKER (not the IRS) makes this transaction correctly. Most brokers that I know have this feature online.

It's really important that you just don't sell without selecting, as that will likely give you FIFO, and maybe sell the shares you just bought, depending on when you process the order.

Note that if the sale was a loss you would run afoul of Wash Sale rules, but this doesn't apply to gains.

 

[knick1959]

This is a private company and "selling" happens all internally. I would assume that all of the monster share/option holders want to do a similar thing. I will document my intentions from my end (on the signature form that I turn in). And I'll ask more questions of our internal finance people.

Thanks.

 

[Matt]

This is a private company and "selling" happens all internally. I would assume that all of the monster share/option holders want to do a similar thing. I will document my intentions from my end (on the signature form that I turn in). And I'll ask more questions of our internal finance people.

Thanks.

Sorry - missed that it was a private company. It may be a little more complicated than it appears as each company has different internal rules on what happens.

In a public company, it is pretty straightforward as you have a market price, but when you now immediately vest due to the investor event - what exactly does that mean? Are they setting a share price?

Also I read it as you had shares for 8 years that you have already exercised vs these new options.. I hope that is correct? The other thing that you'd have to worry about if you were liquidating options (depending on type/duration held) is the AMT.