Disqualifying disposition for non-qualified options?
Jay
non-qualified options? (Not an ISO.)
Example: non-qualified options exercised in year 2000:
$1 per share option price.
$5 per share market price at time of exercise.
So taxpayer is on the hook for taxes on $4 per share
ordinary income in 2000.
The share price has fallen to $0.60 per share. (uh-oh!)
What if the shares are sold in 2000? Can the ordinary income
be nullified? I don't mean getting a _capital_ loss of $4.40
per share; what I mean is somehow nullifying the _ordinary_
income.
If this is possible, where in the tax code or regs is it found?
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Ed Zollars
> Is there such a thing as a disqualifying disposition for
> non-qualified options?
Nope. There is no special treatment available if you hold
onto stock received on nonqualified options and that stock
falls in value.
The reason the rule exists for ISOs is because, by their
nature, people tend to hold onto ISOs because immediately
selling them normally would increase the tax. However, you
can sell shares received from NQSOs immediately upon
exercise, so you could have avoided the risk at no extra tax
cost.
Essentially, you are in the same position as someone that
took their bonus check and bought the stock--when it falls,
you have a capital loss.
---
Ed Zollars, CPA (AZ)
ezo...@primenet.com
http://www.hmtzcpas.com
A.G. Kalman
> Is there such a thing as a disqualifying disposition for
> non-qualified options? (Not an ISO.)
No. You just hit upon one of the disadvantages of a NQSO.
--
Alan
Tax resources on the Internet by subject
and category may be found at my home page.
http://pages.prodigy.net/agkalman/
cedar...@my-deja.com
> non-qualified options? (Not an ISO.)
Nope, it's "disqualified" (non-qualifying) from the get go.
You get ordinary income on the exercise date, and a later
capital gain/loss when you sell, with the basis pegged to
the exercise date fair market value.
> The share price has fallen to $0.60 per share. (uh-oh!)
Oh, the sad, sad tale of dot com options gone bad.
Don't forget that ole $3K limitation on excess capital
losses...the dot commers may be writing off their option
losses for years to come...
-cs
Rich Carreiro
> Is there such a thing as a disqualifying disposition for
> non-qualified options? (Not an ISO.)
No.
> Example: non-qualified options exercised in year 2000:
> $1 per share option price.
> $5 per share market price at time of exercise.
> So taxpayer is on the hook for taxes on $4 per share
> ordinary income in 2000.
>
> The share price has fallen to $0.60 per share. (uh-oh!)
>
> What if the shares are sold in 2000?
Short-term capital loss.
> Can the ordinary income be nullified?
No.
> I don't mean getting a _capital_ loss of $4.40
> per share; what I mean is somehow nullifying the _ordinary_
> income.
Doesn't happen.
--
Rich Carreiro rlc...@animato.arlington.ma.us
David Woods EA MST
> non-qualified options? (Not an ISO.)
No.
> Example: non-qualified options exercised in year 2000:
> $1 per share option price.
> $5 per share market price at time of exercise.
> So taxpayer is on the hook for taxes on $4 per share
> ordinary income in 2000.
>
> The share price has fallen to $0.60 per share. (uh-oh!)
>
> What if the shares are sold in 2000? Can the ordinary income
> be nullified? I don't mean getting a _capital_ loss of $4.40
> per share; what I mean is somehow nullifying the _ordinary_
> income.
Nope. You have ordinary income and a short-term capital loss.
David M. Woods, EA, MST
(617) 723-2422
Boston, MA
www.rytercpa.com
tuy...@my-deja.com
> Is there such a thing as a disqualifying disposition for
> non-qualified options? (Not an ISO.)
>
> Example: non-qualified options exercised in year 2000:
> $1 per share option price.
> $5 per share market price at time of exercise.
> So taxpayer is on the hook for taxes on $4 per share
> ordinary income in 2000.
>
> The share price has fallen to $0.60 per share. (uh-oh!)
>
> What if the shares are sold in 2000? Can the ordinary income
> be nullified? I don't mean getting a _capital_ loss of $4.40
> per share; what I mean is somehow nullifying the _ordinary_
> income.
>
> If this is possible, where in the tax code or regs is it found?
To my knowledge, there is no such thing as a disqualify
dispostion for non-qualified options. This term is often
used for ISO. When you exercised your NQ, the spread
between the FMV at the date of exercise less option price
will be subject as compensation income. Your tax basis is
now the cost plus taxable spread. When you sell your stock
and if it's a loss, then you report a capital loss on your
Schedule D. Whether it's long-term or short-term depends on
your holding period since the date of exercise. You can
offset CL against CG and deduct $3,000 as a capital loss.
The Internal Revenue Code Section (IRC) for ISO is section
422. For Non-Qualified stock options, the code section is
IRC Section 83.
Hope this helps!
Ed Zollars
> Don't forget that ole $3K limitation on excess capital
> losses...the dot commers may be writing off their option
> losses for years to come...
Maybe not--many who had exercised NQSOs immediately sold the
shares (because it could be done at zero tax cost). Only
those that made the investment decision to hold onto the
shares are getting burned--and they are burned in the same
way I would have been had I taken my cash bonus from a year
ago and invested it all in a company whose stock price
collapsed this year.
---
Ed Zollars, CPA (AZ)
ezo...@primenet.com
http://www.hmtzcpas.com
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Charles Markham EA
loss might qualify for 1244 treatment?
Charles Markham