Why now might be a great time to exercise those options



If you work for a technology company, it’s often the case that you’ve been given stock options as part of your hiring deal or along the way for doing a great job. If you’re lucky enough to have some value in your options, you may be able to exercise or, what most people tend to do, wait to exercise until after their company goes IPO or is acquired, albeit expecting the largest profit possible. There are reasons to exercise early and not wait for your company's potential payday. Here are some considerations for exercising early.


The tech sector has taken a massive hit. The Invesco QQQ Trust “QQQ” tech index is down 25% year-to-date, while the Vanguard Value index “VTV” is only down 5% year-to-date. This was expected as tech stocks are notoriously interest rate sensitive, and with the Federal Reserve raising rates, a contraction was bound to happen. This might be good news in the intermediate term as interest rates impacting stock prices are more of a normal market reaction as opposed to substantive issues in the tech sector. I suspect a recovery in this space.


Nobody likes to see their company stock go down. However, if you think your company’s stock price will recover, exercising your options now may result in lower taxes and a higher net profit when you sell later. This is for those sitting on vested options with some value and know that exercising and holding would require some money upfront.


NSO’s are tax heavy. Meaning that when you exercise, the entire amount up to the stock price is taxed as ordinary income. Cash would be collected upfront and/or withholding from salaries occur, resulting in a smaller net paycheck.


NSO strategy

  • Exercise now and sell later. Your upfront costs may be heavy, but the amount above the exercise price would be taxed as capital gains instead of the higher ordinary income as long as you sell a year later. This plan works even better if the stock price recovers at this point.


ISO strategy

  • If you’ve held ISO grants for at least two years, you can exercise now and then sell a year later to obtain capital gain treatment on the amount above the exercise price and no tax may apply to the grants themselves ^2.


At Eureka Wealth Management I help clients make tactical decisions with their options. I also do retirement planning, investments, and tax/estate strategies. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com. For tax advice, consult a tax advisor.




Sources:

https://secfi.com/learn/nso-non-qualified-stock-options-tax-treatment

^2 https://carta.com/blog/equity-101-exercising-and-taxes/#:~:text=With%20ISOs%2C%20ordinary%20income%20tax,until%20you%20sell%20the%20stock.