USA ISO Stock Question

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I have a tax question pertaining to ISO stock that I received from a startup that I just recently resigned from.

When I joined the company, I received 144,617 shares at a strike price of .005 and after I left the company I had 60 days to exercise the shares that I received.

After I exercised my shares, I cut a check in the amount of: $723.09 (144,617 X.005).

Just a month prior to my resignation, the company raised a small amount of capital at a strike price of .0947.

Now to my question, prior to my resignation I was never on salary hence their was no reason to have had withholding set up. I was working with my sweat equity. Now, since I exercised my ISO options at a strike price of .005, am I obligated to withhold tax on this exercise now that the company raised capital at .0947?

To be clear, I never made any money on the exercise (only send in a check). I wanted to be clear that I don't need to withhold any tax for the difference in my exercise price of .005 vs. the .0947

As always, their is always a possibility the company will not be around two years from now.

Thanks in advance for answering my question!
 
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Are you sure you got an ISO? They are only granted to employees. However, If the options you got are ISO's, you don't owe any income tax upon exercise. However, the difference between what you paid & the fair market value when you exercised should be reported in the AMT calculation on your tax return. That difference may not be the same as the strike price for the secondary capital raise. If you hold the stock for 1 year or longer, I believe the difference between what you paid & what you get when you sell, will be a capital gain. If you sell it before a year from exercise date, the gain is ordinary income.
 
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Are you sure you got an ISO? They are only granted to employees. However, If the options you got are ISO's, you don't owe any income tax upon exercise. However, the difference between what you paid & the fair market value when you exercised should be reported in the AMT calculation on your tax return. That difference may not be the same as the strike price for the secondary capital raise. If you hold the stock for 1 year or longer, I believe the difference between what you paid & what you get when you sell, will be a capital gain. If you sell it before a year from exercise date, the gain is ordinary income.

Hi Shelly,

Thank you for all your help with answering the question.

Here is a copy of my Stock agreement (with name,address, company info taken out):

https://www.dropbox.com/s/0r7e2kpf3862m6k/XXXXX.pdf?dl=0

Yes, the way I interepert the agreement, it was ISO.

Based on your reply, I may have a AMT tax to pay?

Thanks!
 
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Just because your agreement says the options were ISO's, doesn't mean that they were. The IRS may rule that they were not because you were not an employee when you got them. However, you will probably be ok claiming them as ISO's based on your document. That said, I suggest you read paragraph 9 of the agreement which explains the tax treatment. Basically, you have to wait a year before you exercise the option and then wait another year before you sell the stock to get capital gains treatment on the bargain element. As for AMT, remember that the amount to include in your AMT calculation is only the difference between what you paid for the stock and the value on the day you exercised the option. If the company's capital raise was completed after you exercised your option, that might not be the value to use.
 
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Hi Shelly,

Once again, thank you for all you help with answering my questions!

In regards to paragraph 9, I was not at the company a full year prior to the option exercise. Will this have an adverse tax consequences on my option exercise?

The company's capital raise came before I exercised the option (naturally). I will figure out what the FMV was when I exercised to help assist with the AMT.

Lastly, I have carryover losses from previous years, will this help reduce my tax consequences on the option exercise (if I have any)? - Based on what you wrote above, since I did have ISO stock, I should not have any tax on the option exercise but now because I exercised it before I held it a full year, does this impact me?


Once again, thank you for your help!
 
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If there was not a full year between when you received the option and when you exercised it I believe, but am not sure, that the difference between the exercise price and the value of the shares on the date of exercise will be considered compensation and should be treated as ordinary income on your tax return in the year you exercised the option. If you hold the shares for more than 1 year after you exercised the option, I believe the difference between the price you get when you sell the shares and the price you paid would be a capital gain.
 
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You generally pay no tax when an option is granted because you are not receiving any shares of stock, only the option to purchase shares at a later date.
 
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Tanya,

Thanks for your reply.
I had the grant in the form of an ISO stock however I exercised the ISO stock at a strike of .005 and at the time I exercised the strike, the stock was at .0094.

This is where I was wondering if their was a taxable event?


Thanks!
 

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