Cisco's taxes

[Max Sawicky]

Now when is the premium between the exercise price of the option and 
the current price of the stock taxable? Are you taxed on the spread 
when you exercise the option, and is your basis for the stock then 
the price of the stock on the day you exercised the option? Or is 
your basis the exercise price of the option, and are you taxed on the 
whole bundle when you sell the stock?
I think the first, but all of a sudden I'm not sure.
I used to know this...
Brad DeLong

I never knew it, till now.  According to my J.K. Lasser,
the short answer is the option is not taxed when received
or exercised, only when the stock is sold.  So on this
count the transfer of income does imply a revenue drain
since capital gains rates are much lower than rates on
ordinary income or corporate income.  One exception is
if the holding period is short -- then the 'ordinary'
income rates apply.  A second is that the spread is
subject to the AMT (which also has lower marginal
rates).  The basis is the price gross of the spread --
the purchase price of the stock. But it can get much
more complicated, naturally.

So on the whole the transfer is indeed tax
bounty for the rich.

mbs