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Dividends Pd in Stk. Yield to Call Method.

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About Us Rate this Website. Acquired Through Stock Options. Stock can be acquired through stock options in various ways: Qualified incentive stock options 2.

Non-qualified stock options 3. Exercise of a call option you bought 5.

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Exercise of a put option you sold The cost basis method for each of these types of options is explained below. Qualified Incentive Stock Option Plans: Incentive stock option plans are "qualified" if they meet the requirements of Internal Revenue Code Section In addition, the stock acquired must be held for at least one year after exercise of the option in order to receive favorable treatment.

Your employer will be able to tell you if the options you have been granted meet these conditions.

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The tax owed depends on how long the stock was held after exercise of the option: If the stock is held for at least one year after exercise of the option, the gain is a long-term capital gain.

The amount of compensation is the fair market value of the stock less the exercise price at the time of exercise of the option. The cost basis for AMT purposes is increased by the same amount if the taxpayer is subject to AMT.

Non-qualified employee stock option plans: Stock option plans are "non-qualified" if they do not meet the requirements of Internal Revenue Code Section These options are also called "non-statutory. If the fair market value of the option is readily ascertainable i.

At exercise, the cost basis of the stock received is the sum of: No further income is recognized at the time the option is exercised. The holding period begins the day after the option was exercised.

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The fair market value of the employee's non-qualified stock option may not be readily ascertainable because the options are not publicly-traded, are not transferable, are not exercisable immediately, or have conditions that would impact fair market value. In this case, the date of exercise determines the taxable event, rather than the date of the grant as in the "readily ascertainable" case above. The cost basis for the stock acquired then becomes the fair market value of the stock at the date of exercise.

The holding period for the stock starts the next day after the option is exercised. Exercise of Call Option: Exercise of Put Option: If an investor has written sold a "put" option the right to sell a stock at a stated price and it is exercised by the holder, the cost basis of the stock he owns or acquires to satisfy the put is the purchase cost of the stock less the premium he received when he sold the put.

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