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- JenL_2
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- Indexer
- Hugs
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- Rande
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- JenL_2
- Rande
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» JenL_2 - More on Early Excercise of ISOs
Thanks Rande - I just posted the follow-up ESO article from 5/13 TSC to the "Employee Stock Options" thread:Early Exercise of Stock Options Draws More Questions
By Tracy Byrnes
Can you clarify the following paragraph from a recent column: "You can make this 83(b) election with your incentive stock options (ISOs) and restricted stock as well. With ISOs, when you early exercise, the spread will be an alternative minimum tax adjustment. Hopefully, the spread is small enough to keep you out of AMT altogether. If you make the election within 30 days of your exercise, you no longer have to follow the ISO rule that says you must hold the stock two years from grant date and one year from the exercise date to get long-term capital gain treatment. As long as you (and the company) stick around for one year, all appreciation is capital gains."
In the stated example, doesn't the employee still have a disqualifying disposition; therefore, all gains are not long-term capital gains? In essence, what is your reasoning that "sticking around for one year" exempts the sale of stock within two years of the date of grant from disqualifying disposition status?
-- James Reilly
James,
Your question is a good one, and you are right that the employee still has a disqualifying disposition. By making the 83(b) election, the incentive stock option rules don't go away, notes Rande Spiegelman, a senior manager in KPMG's investment advisory-services group in San Francisco. But, you no longer have to stress: Since you owe tax on the spread when you disqualify, and, in this case, the spread is negligible -- your taxes for this disposition will also be negligible. And then any upside is taxed at the capital-gains rate.
Here are the ISO basics.
To qualify for the low capital-gains tax rate of 20% -- when you sell your exercised shares -- you must hold your incentive stock options for two years from the grant date and one year from the date of exercise.
If you do not wait these requisite years, you have a "disqualified disposition," according to the technical jargon in section 422 of the tax code. When you disqualify, the difference between your exercise price and the stock's price at the time of exercise, a.k.a. the spread, is subject to ordinary income tax.
OK. Let's now assume your options plan allows you to exercise your shares early. Since the difference between your exercise price and the stock's current price is zero, you decide to do exercise early because you believe that the stock's going to pop.
In addition, you make the section 83(b) election and notify the Internal Revenue Service within 30 days of your exercise that you're doing so. The election allows you to convert more of the stock's future appreciation into long-term capital gains, assuming you stay with the company and hold the shares for at least one year.
A year later, your shares have vested, the stock is way up and you decide to sell. Technically, you have disqualified the position, according to the tax rules. The original spread at exercise is now taxed as ordinary income.
But wait -- there was no spread! So, who cares! And thanks to 83(b) you'll owe long-term capital gains tax on the sale.
What if there is a little spread? "If prospects for stock look great, then it's not a problem," says Spiegelman.
Here's why. Say your exercise price was a nickel and you did an early exercise when the stock was at $5. Let's assume that $4.95 is too small to give you alternative minimum tax nightmares, so you don't owe tax at this point.
You elect 83(b) and notify the IRS within 30 days of your exercise that you're making this election.
The stock zooms to $100 a year later. Your vesting is up and you decide to sell. You now have a "disqualifying disposition" and the spread will be taxed as ordinary income. So you will owe ordinary income tax up to 39.6%, on the $4.95. But thanks to 83(b), you're only paying 20% on the $95.05.
"Tax minimization is not the goal. Maxing your after-tax profits is," reminds Spiegelman.
So while the rules don't go away, the 83(b) election just allows you to care a lot less about them....
....Jen
-- posted by JenL_2
» Rande - We've been advised to forget about the "rear-view mirror.
We've been advised to forget about the "rear-view mirror." So, what should we focus on? Obviously, the....Front-View Windshield
-- posted by Rande
» Indexer - Relationship of Trading Volume to Price Trends
Rande, Hope you can help educate me a bit. I keep hearing about trading volume as an indicator, with some days being described as "distribution" days, and other days as being driven by buyers, because of the volume. Also, if the market tests certain lows or highs, but does it on lower or higher volume, it means different things. Can you give me some understanding of this dynamic? Thanks.-- posted by Indexer
» Hugs - While you're at it, Rande...
maybe you could speculate on whehter you think most of the gum flapping is just to "make us little guys" seem "not as smart" as them big guys (you know, the talking heads.)Elsewise, why would "we" listen to them at all? Then everyone would all tune in to Jeopardy instead of the Nightly Business Report.
Hu
-- posted by Hugs
» Rande - Indexer,
Indexer,Volume is a technical indicator that many believe shows the level of conviction on the part of buyers and sellers. When marginal new highs or lows are made on light volume, some view it as less convincing as when such moves are accompanied by heavy volume. Some track things such as buy volume vs. sell volume to get a feel for market direction. Typically, technical indicators such as volume and market breadth (advancers vs. decliners) are utilized by short-term traders and market timers. They also make for good media filler. As Hugs suggests, in the grand scheme of things focusing on this kind of market esoterica likely does more harm than good for the average investor. Over the long-term, things such as daily volume are not so important and contribute to little besides the short-term noise that can be so distracting for those who take it to a level of seriousness beyond that of interesting or entertaining discussion.
-- posted by Rande
» JenL_2 - More Market Timing Folly
Ths is the 5/16 free email market timing newsletter from
W a l k e r M a r k e t L e t t e r
// -- MODEL UPDATE -- //
Timing Strategy - 100% money markets, 0% stocks as of 11/2/99
First off, there are no changes in any of our models.
Despite the huge volatility that we are seeing on a daily basis, the stock market has been winding itself into a tighter and tighter range. From the looks of the charts, the market is poised to have some type of a sustained move...at least sustained for more than a couple of days.
With the Fed expected to raise rates on Tuesday, it looks like we might have the catalyst for that sustained move. Now normally, higher interest rates are considered to be a bad thing for the stock market. But a Fed hike in rates will hardly be earth shattering news...the market has already "discounted" a rate increase of 50 basis points. Ostensibly, that is what the last week's selloff was all about.
And to take this one step further, the rally that began last Thursday and drove the Dow higher by 518 points by Monday's close was a "relief" rally. Relief from what? Good question..I don't think it was "relief" that the Fed was *only* expected to raise rates by 50 basis points. Maybe it was relief that we no longer have to look forward to the May Fed meeting (of course, that relief will only last about 30 minutes before people start thinking about the next Fed meeting).
Now I am sure you have no trouble following the logic there, but I still find it pretty twisted. The Fed meeting is on Tuesday, the Fed is going to raise rates, and they are going to raise them significantly. And the market has not only already sold off, but it has also had a relief rally!
OK, back to the charts. Like I mentioned above, they look poised for a big move. The market has wound itself into a tight range, and generally when these types of ranges are broken we get an extended move in the market. And we have a Fed announcement tomorrow, something that usually brings on a big move. So simply put, the next couple of days look very important for the trend over the next few weeks.
So, with that said, which direction is the market going to go? Frankly, I don't know. There are good arguments for either direction.
First, the bullish outlook...the last five times the Fed has raised rates, the market has rallied. The Fed is going to raise rates on Tuesday, so the market should rally...right? In addition, some of our indicators that track the market internals are *starting* to shape up and look somewhat bullish. And finally, the market is poised right up against heavy resistance...a good rally on Tuesday could be enough to break through that resistance.
OK, now the bearish case. First, on the short term, the market is very overbought. The term overbought might sound technical, but it is simple. Think of the market as a big rubber band, if it is stretched too far in one direction, eventually it has to snap back. Well, the rally since last Thursday has stretched things pretty far in the bullish direction, and it looks like the market is poised to snap back. Second, that overhead resistance that we mentioned above...well that is as good a place as any for the market to turn down. Third, it seems like the conventional wisdom is that we will get a relief rally after the Fed raises rates. But as I mentioned above, we have already seen a pretty strong "relief rally". This looks like it could be a case of "buy the rumor, sell the news". In this case, the rumor is the rate hike, and the news will be the actual announcement. And finally, it seems like everyone is looking for a Fed relief rally...so much that I am sick of hearing (and typing!) that phrase. The stock market is rarely so accommodating to the masses.
So, where does all this leave us? Watching our model...which has us mostly on the sidelines. With the Dow down 6.0%, the SP500 down 1.1%, and the Nasdaq down 11.3% for the year, collecting money market interest hasn't been all bad. It really looks like the market is poised for a move, and if that move is higher we expect our model will be jumping back into the stock market soon. But for now we are going to wait and see.
With the market set to explode, this is a good time to upgrade your subscription from the Walker Market Letter to the Walker MarketEdge. You will get all the extra issues, including the FLASH UPDATE when we get the "all clear" signal to start getting aggressive in the stock
market again……
NEXT ISSUE: the week of June 1st.
Good luck,
Jeff
Disclaimer: The financial markets are risky. Investing is risky. Past performance does not guarantee future performance. The foregoing has been prepared solely for informational purposes and is not a solicitation, or an offer to buy or sell any security. Opinions are based on historical research and data believed reliable, but there is no guarantee that future results will be profitable.
Not going to satirize this one - it speaks for itself. Trying to time this market is folly, especially considering how fast the market moves in either direction. If they were really any good at market timing they would have had their subscribers 100% in the market all along and taking profits in the tech stocks prior to March 10. But IMHO that's the only way one can time this market - in retrospect. It’s clear to me that the main goal of the free Walker Market Letter is to sell subscriptions to the for-fee Walker Market Edge…….Jen
-- posted by JenL_2
» Rande - Jen,
Jen,Reminds me of....
Gather 'round ladies and gents, I'm gonna show you the greatest little invention since man first put flint and steel together to make fire. That's right foks, it's Dr. Goode's Magic Elixir. Doesn't mater what ails you, this golden fluid cures everything from dyspepsia to diabetes. Rub some onto your sore feet and watch those bunyons disappear. Shoot, folks, rub some onto that gravy stain and watch IT disappear. It's good for everything, I tell ya, including ailments that haven't even been invented yet! And how much is gonna cost you? Well, I'm glad you asked.....step right up now, no shoving.
Or, as P.T. barnum once said....
-- posted by Rande
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