|In the game of life...|
Your stock option gives you the right to purchase shares of your employer's stock at a given price. The option also tells you the number of shares you are eligible to buy. You may also be allowed to make purchases at a future date, but not indefinitely - they generally expire.
Terms to know:
- Grant Date = the date you receive the option
- Exercise Date = the date you purchase the stock
- Disposition Date = the date you sell the stock
|sometimes the market is up...|
So the idea is to exercise the options, then sell the stock at a gain. Before you do, though, you have to hold the stock for at least:
- two years from the grant date, and
- one year from the exercise date
Otherwise, part of the sale is ordinary income.
For ESPPs, you may get an option to buy for a price lower than what the stock is trading for at the time. That's good, because you are buying at a discount! In other words, if Blue Sky is selling for $100, and your grant is for $75, you're already ahead. In this case, you have $25 of ordinary income that you will see on your W-2, and later, when you sell the stock, your capital gain (or loss) is based on a $100 purchase price.
|and sometimes down.|
There is more to be said. All the "what ifs" would make this too long of a post, so here are your stock option take aways:
- An option means you can buy stock for whom you work for.
- You could even buy stock at a discount.
- If you do, now you are in the stock market, and you have the chance to sell for gain or loss.
- Use tax planning to make sure you pay tax at more favorable rates.
Thanks to QUICKFINDER, www.quickfinder.thomson.com and JK Lasser's YOUR INCOME TAX www.jklasser.com for being my primary resources for this post. Remember, this is only general information and not tax advice in the "consult your tax advisor" sense. Tax advice that applies to your situation you pay for. This is a general post and it is free of charge.