Intel Corp (INTC)

[Windsock]

This is not totally accurate but it is a good approximation of the situation. There is lots of fine print in the actual rules.

In the old days, Incentive Stock Options (ISOs) were a great deal. You could exercise, hold for the long term and only pay long term capital gains tax when the shares were sold. Then AMT hit and if you held the stock through the end of the year you had to declare the difference between market price and cost at the time of exercisefor an AMT calculation. There was no withholding of tax at the time of exercise.

The big surprise for many people was that they owed tax on a "gain" that that occcured on paper. If you held for a long term, you paid at the long term capital gain rate with a credit for your prior AMT payment. This worked if the stock went up.

A disaster was created when the stock fell and a person owed AMT on a gain that was never realized. In fact, the stock was often below the exercise price when the AMT came due after the crash. The strange result was that you owed AMT even though there was a loss on the transaction.

Even in normal times, many people were surprised when AMT generated tax liability. If you had not planned ahead and made estimated tax payments you could also owe penalties for underwitholding.

Non-qualified options were considered ordinary income at the time of exercise and tax was witheld at that time. This helped many folks because there was no AMT surprise.

People that were aware of the AMT problem would often engage in a buy and same day sale to recognize the gain as ordinary income and set aside an estimated tax. Then the person would take the leftover cash and decide where best to invest it. Another apporach was to sell somestock, pay AMT and the tax on gain and keep the rest of the stock.

Because of these and other factors, ISOs became unattractive and many companies, including Intel, started to grant nonqualified options.