Biotech Values

[biomaven0]

it never made sense that ISO or NSO start the clock on the LT vs ST capital gain based on exercise date rather then grant date or vesting date which seems more appropriate to me.

It goes to the heart of the taxation of options. Until they are exercised they are not a capital asset because the tax law views their value as not easily determined (that's what protects you from being taxed on a vested but unexercised appreciated option). So the gain on exercise of a NQ option is always ordinary income, which steps up the holder's basis and turns the resulting shares into a capital asset and starts the holding period running. (Note this income to the employee is matched with a corresponding deduction for the company).

At this point ISO's are really moot except for low-level employees, because although the gain on exercise is deferred if the shares are not sold for a year, the gain is included in AMT, which generally proves deadly. The only way around that is to disqualify the ISO by selling prior to year end.

Most companies now have provisions in place to prevent executives hedging their options instead of exercising.

The only sensible reason for exercising and holding a NQ option that is not due to expire is to start the cap gains holding period running.

Peter