CASHLESS EXERCISE: EXAMPLE
01.Core Concepts
Annie, an executive, has 10,000 ISOs with an $8 exercise price. When the value of the stock increases to $32, the stock has a total value of $320,000. If Annie exercised today, she would need $80,000 to exercise the option (ignoring any potential AMT consequence). Like many individuals, Annie does not have the $80,000 cash available to exercise the option. Therefore, she m akes a cashless exercise of the option and receives $240,000 (the proceeds from the sale of the stock less the exercise price of $80,000). Since the sale of the stock did not meet the holding period requirements of an ISO, $240,000 will be subjected to ordinary income tax.