InterDigital Inc (IDCC)

[olddog967]

vg_future: According to the following, the tax treatment depends on whether the options were incentive or non-incentive options. The taxation you describe is for non-incentive options. As usual, anything to do with taxes is beyond us mere mortals to understand.

Non-Incentive Stock Options

Generally:   These stock options do not qualify for the special tax-favored treatment that applies to ISOs.  

Tax Rules:   The grant of a non-ISO is normally nontaxable.  The optionee will instead recognize ordinary income when the non-ISO is exercised.  The amount includible in income will equal the difference between the fair market value of the purchased shares and the total exercise price paid for the shares.


Incentive Stock Options (aka ISOs)

Generally:  Incentive stock options - also known as ISOs or qualified options - are distinguished from non-ISOs by their tax favored treatment under section 422 of the Internal Revenue Code.

Basically, neither the grant nor the exercise of an ISO is a taxable event, although the in-the-money value on exercise is a tax preference item that may cause liability under the Alternative Minimum Tax (AMT). 

 Note:  to minimize or avoid AMT liability, consider exercising ISOs over a multi-year period before their expiration.

If the shares purchased on exercise of an ISO are sold more than one year after its exercise and more than two years after the ISO's grant, all gain is long-term capital gain.  Otherwise, the sale generates ordinary income.

Requirements for ISO Treatment:  Section 422 of the Code lists numerous qualification requirements that include (1) stockholder approval within one year, (2) ISO grants only to employees, (3) no lifetime transfers of ISOs, (4) loss of ISO status on the earlier of 10 years from date of grant and three months after termination of employment for a reason other than death, (5) written plan, (6) execise price not less than fair market value, (7) for grants to 10% or more stockholders, a maximum term of 5 years and an exercise price not less than 110% of fair market value, and (8) first exercisable for no more than $100,000 worth of stock per year.