In other words, you could intentionally execute a disqualifying disposition. If you find yourself in either scenario, you could reduce the cash needed for the transaction by exercising and holding some shares and exercising and selling others. Even if you do have this much liquidity available, you still might have very good reasons to not spend it all at once on your options. $316,000 is a lot of money cash to have readily available, and many people aren’t in a position to drop this kind of money all at once. So high that you don’t want to afford it.The total cash call necessary for this transaction may be either: There are two potential problems that are most common when people want to exercise and hold incentive stock options. A Strategy to Cover the Cash Required to Exercise Incentive Stock Options This tells us that you would need $316,000 in cash on hand (which is the cost of your shares at $50,000 plus the $266,000 you owe in AMT) in order to cover all the costs associated with exercising your incentive stock options. Then you need to account for the taxes generated from your exercise. You will need to put up $50,000 to buy your shares. (Number of Options Exercised) x (Exercise Price Per Share) Here’s how to calculate your cost to exercise: In this scenario, the total cash call required is equal to the exercise cost of the shares, plus the AMT you owe from the exercise. You plan to exercise and hold the incentive stock options post-exercise with the goal of obtaining a qualifying disposition. Let’s assume that you have 10,000 incentive stock options with an exercise price of $5 per share and a current fair market price (FMV) of $100 per share. (Number of Shares Exercised) x (Fair Market Value at Exercise – Exercise Price) Calculating the Cash Necessary to Exercise Incentive Stock Options If we assume an AMT rate of 28%, you can multiply that by the bargain element to calculate your estimated cost, and therefore the amount of cash required to pay alternative minimum tax. (But if you’d like to learn more about AMT specifically, start here.) For purposes of this article, we can simplify this if we assume a flat AMT rate of 28% for all of our examples. To calculate the required cash necessary to exercise your incentive stock options, you can multiply the number of shares you will exercise by the exercise price of your ISOs.Ĭalculating the cash necessary to pay the expected alternative minimum tax is more complicated. ![]() The second is when you pay the alternative minimum tax. The first is when you need to pay the exercise cost for your options. When you exercise incentive stock options, you generally need to address two cash calls. ![]() A Simple Look at How Exercising Incentive Stock Options Can Impact Your Cash Flow By strategizing appropriately around the reality of your cash flow, you may be able to better time and plan for whatever exercise strategy you may be considering. Understanding your cash flow plays a big role in making the right choices with your ISOs. And perhaps more importantly, you need to know where the money to pay for the pending cost of your decision will come from. You need to know the cost of exercising your options, for example, and what you might pay in alternative minimum tax. Before you do anything with your incentive stock options, you need to get clear on how exercising those ISOs could affect your assets and your cash flow, and what will it cost you in terms of real money.
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