The problem becomes that he is taxed today for stock options that might become worthless in the future. Of course then he can deduct a fixed amount against future taxes or against taxes owed, but in worse case scenarios it takes more than a lifetime to get even with the taxes paid to the IRS from the stock options.
There have not been such horror stories recently with stocks going up generally, but at the end of the internet bubble, there were people imputed a million dollar in income because of the stock options, and then they found out they had no money to pay these taxes because by the time they got around to it the stocks had all crashed and the options were worthless.
Depends on the form and substance of the stock holding, but in general stock options are immediately taxed as current compensation;
For non-qualified stock options (NSO):
The grant is not a taxable event.
Taxation begins at the time of exercise. The bargain element of a non-qualified stock option is considered “compensation” and is taxed at ordinary income tax rates. For example, if an employee is granted 100 shares of Stock A at an exercise price of $25, the market value of the stock at the time of exercise is $50. The bargain element on the contract is ($50 to $25) x 100 = $2,500. Note that we are assuming that these shares are 100 percent vested.
The sale of the security triggers another taxable event. If the employee decides to sell the shares immediately (or less than a year from exercise), the transaction will be reported as a short-term capital gain (or loss) and will be subject to tax at ordinary income tax rates. If the employee decides to sell the shares a year after the exercise, the sale will be reported as a long-term capital gain (or loss) and the tax will be reduced.
Incentive stock options (ISO) receive special tax treatment:
The grant is not a taxable transaction.
No taxable events are reported at exercise. However, the bargain element of an incentive stock option may trigger alternative minimum tax (AMT).
The first taxable event occurs at the sale. If the shares are sold immediately after they are exercised, the bargain element is treated as ordinary income.
The gain on the contract will be treated as a long-term capital gain if the following rule is honored: the stocks have to be held for 12 months after exercise and should not be sold until two years after the grant date. For example, suppose that Stock A is granted on January 1, 2007 (100% vested). The executive exercises the options on June 1, 2008. Should he or she wish to report the gain on the contract as a long-term capital gain, the stock cannot be sold before June 1, 2009.
Read more: Get The Most Out Of Employee Stock Options https://www.investopedia.com/articles/optioninvestor/07/esoa…
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As such, since the stock option has an immediate taxable aspect to it if it is given at a “bargain” price, it strongly behooves the grantee to promptly exercise the vested shares to avoid any risk of getting stuck with the tax while the stock itself tanks and thereby removes the funds to pay the taxes at later date when you may actually exercise.
That is but one reason to sell stock options. Another is simply you need the money, or you want to diversify, or you are considering leaving the company, etc. Many reasons to sell, some very compelling.