Exercising Options, then Borrowing on Margin to Pay Taxes
I have a question regarding margin accounts. Is it possible to borrow against your stock via margin loan to pay for state/federal taxes owed when exercising a NQ stock option? From my reading of the tax code I believe it is ok because I would be securing my investment in the stock? I want to do this because I know the stock is going to split soon and I must exercise my options before this event. I don't want to have to sell shares to pay taxes when I know these same shares will split and I'll have twice as many shares. I am very bullish on the stock and would rather carry a loan at 8% for one year, take advantage of the split, pay off the loan after one year and then write off the margin interest to carry the security. Is this possible?
Yes, it is possible and could be a good, if risky, strategy. Note: Many of high-tech's best and brightest employees are now broke because they employed the same strategy and their company's stock tanked. You need to find a broker who will lend you the needed money -- presumably on the stock, once the options have been exercised. Another issue: Will your company demand the tax withholding money from you immediately or will it allow you to obtain funds through borrowing?