> When an employee exercises an option to buy stock, the difference
> between the strike price (what the employee pays) and the market
> price (which is almost always higher) becomes taxable income for the
> employee and a tax deduction for the employer.
But if a cashless exercise is used to deal with most stock options, then presumably the cost to the company is only however much it would have cost to buy the stock option for that strike price at the time the option was given to the employee. The whole point of stock options would appear to be that you expect the rise in market price to be greater than the cost of the stock option. So while the employee may indeed be paying tax on the money he or she makes from exercising the option doesn't change the fact that the company is getting a tax deduction that is greater than the cost of the option.
David.
> -----Original Message-----
> From: Jordan Hayes [mailto:jmhayes at j-o-r-d-a-n.com]
> Sent: Tuesday, October 10, 2000 12:14 PM
> To: lbo-talk at lists.panix.com
> Subject: RE: Cisco's taxes
>
>
> From sawicky at epinet.org Tue Oct 10 08:40:22 2000
>
> the short answer is the option is not taxed when received
> or exercised, only when the stock is sold.
>
> In practice, most stock options are dealt with using "cashless
> exercise" which means you simultaneously a) exercise the option
> and b) sell the stock; you net, in cash, the difference.
>
> Options can be taxed at grant time if the strike is below market
> value (the difference is ordinary income); in practice, people try
> to avoid this.
>
> ---
>
> Doug's initial forwarding of the article begs the question: what's
> wrong? If it's the absurdity of a company who "made $2.8B paid no
> tax" then you just need to think about it harder (and remember the
> lesson of AMT!); if it's that the tax coffers should benefit from
> Cisco's success, it appears that more tax is paid by the individuals
> (who are also less likely to be able to hide their gains than
> corporations) who exercised.
>
> /jordan
>