Sidebar to November 26, 2000 Column

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, November 26, 2000.

Copyright 2000  Robert L. Sommers, all rights reserved.

Vesting: When an option or stock vests, it means the employee owns it without restriction. With respect to an option, it means the employee may exercise the option to obtain the stock. In most cases, the stock received is vested (has no restrictions). However, with an early exercise usually the stock received is not vested.


Long-Term Capital Gains: In Joe's situation, long-term capital gains means the profit from the sale or disposition of stock which has been held for 12 months or longer. The holding period begins once you receive the stock; you do not include the period when you held the option. These gains are taxed at a maximum federal rate of 20%. California does not have a capital gains rate, thus gains are taxed as ordinary income. The goal is to have as much of your gain as possible taxed as long-term capital gains.


Alternative Minimum Tax (AMT) is an alternative taxing system to regular income tax. The AMT prevents taxpayers from using certain loopholes and deductions to greatly reduce, if not totally eliminate, their tax liability. Your tax liability is computed both under the regular tax system and under the AMT and you pay whichever is higher.

The spread on vested stock received from exercising an ISO is a tax preference under the AMT. If unvested stock is received when exercising an option, the AMT tax preference does not occur until the stock vests.



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All contents copyright 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.