Incentive Stock Option (ISO) tax question - more specific this time
"Alternatively you could exercise 12000 shares for $36000 and immediately sell 7200 shares to recover your exercise price. Then you use the remaining 4800 share to pay the exercise price of the remaining 8000 options. Both scenarios are equivalent but may have different fees associated, so it's worth checking the fine print.  Tax wise: The above example is ""cash neutral before taxes"". The taxes associated with these transaction are substantial, so it's highly recommended to talk with a tax adviser. ""cash neutral after taxes"" depends highly on your specific tax situation." "I've bought ISO stock over they years -- in NYSE traded companies.  Every time I've done so, they've done what's called ""sell-to-cover"".  And the gubmint treats the difference between FMV and purchase price as if it's part of your salary.  And for me, they've sold some stock extra to pay estimated taxes. So, if I got this right...  20,000 shares at $3 costs you 60,000 to buy them.  In my sell-to-cover at 5 scenario: did I get that right?  Keeping only 4,000 shares out of 20,000 doesn't feel right.  Maybe because I've always sold at a much ratio between strike price and FMV. Note I made some assumptions:  first is that the company will sell some of the stock to pay the taxes for you.  Second is your marginal tax rate.  Before you do anything check these. Is there some reason to exercise immediately?  I'd wait, personally."
"You mention ""early exercise"" in your title, but you seem to misunderstand what early exercise really means. Some companies offer stock options that vest over a number of years, but which can be exercised before they are vested. That is early exercise. You have vested stock options, so early exercise is not relevant. (It may or may not be the case that your stock options could have been early exercised before they vested, but regardless, you didn't exercise them, so the point is moot.) As littleadv said, 83(b) election is for restricted stocks, often from exercising unvested stock options. Your options are already vested, so they won't be restricted stock. So 83(b) election is not relevant for you. A taxable event happen when you exercise. The point of the 83(b) election is that exercising unvested stock options is not a taxable event, so 83(b) election allows you to force it to be a taxable event. But for you, with vested stock options, there is no need to do this. You mention that you want it not to be taxable upon exercise. But that's what Incentive Stock Options (ISOs) are for. ISOs were designed for the purpose of not being taxable for regular income tax purposes when you exercise (although it is still taxable upon exercise for AMT purposes), and it is only taxed when you sell. However, you have Non-qualified Stock Options. Were you given the option to get ISOs at the beginning? Why did your company give you NQSOs? I don't know the specifics of your situation, but since you mentioned ""early exercise"" and 83(b) elections, I have a hypothesis as to what might have happened. For people who early-exercise (for plans that allow early-exercise), there is a slight advantage to having NQSOs compared to ISOs. This is because if you early exercise immediately upon grant and do 83(b) election, you pay no taxes upon exercise (because the difference between strike price and FMV is 0), and there are no taxes upon vesting (for regular or AMT), and if you hold it for at least 1 year, upon sale it will be long-term capital gains. On the other hand, for ISOs, it's the same except that for long-term capital gains, you have to hold it 2 years after grant and 1 year after exercise, so the period for long-term capital gains is longer. So companies that allow early exercise will often offer employees either NQSOs or ISOs, where you would choose NQSO if you intend to early-exercise, or ISO otherwise. If (hypothetically) that's what happened, then you chose wrong because you got NQSOs and didn't early exercise." "The short version of JB King's excellent answer is that the company will typically buy back shares from the open market at market price. Sometimes, it will specifically target larger stakeholders, even controlling interests, who are making noise that they want to divest; if such an investor were to just dump their stock on the open market, neither the investor nor the company would be very happy with the resulting price collapse. In those cases, the company may offer an incentive price above market rates. In recent times, the investor looking to divest has often been the U.S. Government, who received stock in return for bailouts, and (with notable exceptions) turned a modest profit on many of them. Not enough to break even on the entire bailout, but the Government didn't just throw $700 billion in taxpayer money down a hole as conservative pundits would have you believe. In the '80s, a specific type of buy-back was made famous, called the ""leveraged buyout"". Basically, the company took out a huge loan against itself, and used that money to buy up all the company's publicly-traded shares, essentially becoming a private company. This became a popular tool among private equity groups, for better and worse." This question is very open ended. But I'll try to answer parts of it. An employer can offer shares as part of a compensation package. Instead of paying cash the employer can use the money to buy up shares and give them to the employees. This is done to keep employees for longer periods of time and the employer may also want to create more insider ownership for a number of reasons. Another possibility is issuance of secondary offerings that are partially given to employees. Secondary offerings often lower the price of the shares in the market and create an incentive for employees to stay until the stock price rises. All of these conditions can be stipulated, look up golden handcuffs. Usually stock gifts are only given to a few high level employees and as part of a bonus package. It is very unusual to see a mature company regularly give away large amounts of stock, as this is a frowned upon practice. Start ups often pay their employees with stock up until the company is acquired or goes public. "Why only long term investments? What do they care if I buy and sell   shares in a company in the same year? Simple, your actually investing when you hold it for a long term. If you hold a stock for a week or a month there is very little that can happen to change the price, in a perfect market the value of a company should stay the same from yesterday to today so long as there is no news(a perfect market cannot exist). When you hold a stock for a long term you really are investing in the company and saying ""this company will grow"". Short term investing is mostly speculation and speculation causes securities to be incorrectly valued. So when a retail investor puts money into something like Facebook for example they can easily be burned by speculation whether its to the upside or downside. If the goal is to get me to invest my money, then why not give apply   capital gains tax to my savings account at my local bank? Or a CD   account? I believe your gains on these accounts are taxed... Not sure at what rate. If the goal is to help the overall health of business, how does it do   that? During an IPO, the business certainly raises money, but after   that I'm just buying and selling shares with other private   shareholders. Why does the government give me an incentive to do this   (and then hold onto it for at least a year)? There are many reasons why a company cares about its market price: A companies market cap is calculated by price * shares outstanding. A market cap is basically what the market is saying your company is worth. A company can offer more shares or sell shares they currently hold in order to raise even more capital. A company can offer shares instead of cash when buying out another company. It can pay for many things with shares. Many executives and top level employees are payed with stock options, so they defiantly want to see there price higher. these are some basic reasons but there are more and they can be more complex." "What could the tax issues with the IRS be? I thought (but not totally certain) that the tax treatment of an ISO option was based on difference between exercise price and FMV at the time of the sale.  This is an accounting issue. There were times not so long ago that companies actually did these things on purpose, to boost the stock grant values for their employees (especially senior employees). They would give a grant but date it with an earlier date with a more favorable valuation. This is called ""backdating"", and it brought companies down and CEOs into criminal courts. In addition, only reasonable compensation is allowed as a deduction for the company, and incorrectly set strike price may be deemed unreasonable. Thus, the deduction the company would take for your compensation can be denied, leading to loss of tax benefit (this was also a weapon used by the IRS at the time against companies doing backdating). Last but not least, company that has intentions of going public cannot allow itself such a blatant disregard of the accounting rules. Even if the mistake was not made on purpose (as it sounds), it is a mistake that has to be corrected. What should I take into consideration to determine whether a 27% increase in shares is a fair exchange for an increase in 270% increase in strike price. Did you know the strike price when you signed the contract? Was it a consideration for you? For most people, the strike price is determined at the board approval, since the valuations are not public and are not disclosed before you actually join, which is already after you've agreed to the terms. So basically, you agreed to get 100 sheets of toilet paper, and instead getting 127 sheets. So you're getting 27 sheets more than you initially agreed to. Why are you complaining? In other words, options are essentially random numbers which are quite useless. By the time you get to exercise them, they'll be diluted through a bunch of additional financing rounds, and their value will be determined for real only after the IPO, or at least when your company's stocks are trading OTC with some reasonable volume. Until then - it's just a number with not much of a meaning. The FMV does matter for early exercise and 83(b) election, if that is an option, but even then - I doubt you can actually negotiate anything." Some other answers mention the ability to sell at grant. This is very important. If you have that ability, think about your guaranteed return. In my case, I get a 15% discount on the lowest 6 month window price from the last two years.  If you do the math, the worst case return can be calculated: 1) Money that from the beginning of the window, I make 15% for 6 months (30% annual return guaranteed) 2) Money at the end of the window (say the last month) is 15% for one month (180% annual return guaranteed) In the end, your average holding window for your money is about 3 months (you can calculate it exactly). At that rate, you have a guaranteed 60% annual return. You can't beat that anywhere, with a significant upside if your company stock is increasing. So, if your company has an instant sell at grant option, you have to be brain dead not to do it. If it takes time to get your shares, then you need to look at the volatility of the stock to see how big the chance of losing money is. To generalize to a formula (if that's what you want): WM = purchase window (in months); D = Discount Percentage; GR = Guaranteed Return GR = 12/(WM/2) * D = 6*D/WM One last thing, If you are going to participate in ESPP, make you that you understand how to do your taxes yourself. I haven't found a tax person yet who does ESPP correctly (including an ex IRS agent), so I always have to do my taxes myself to make sure they get done correctly. I am a registered S-corp but for alot of industries that threshold is too low (I'm in housing) &gt;Do you have any insight on average *effective* rates paid by SE owners? &gt; &gt;As a counterpoint to your (very valid) links, filing as S-corp allows for taxes on distributions to be exempt from payroll tax and taxed at much lower rates. Also, being SE allows for various deductions not possible for wage earners. There's probably other examples not immediately coming to mind. &gt; &gt;Also, SE taxes equal taxes otherwise paid by employer + employee. It's just that those employer taxes don't appear on the employee's paystub so not everyone realizes this.   The article I posted also doesn't take into account state taxes, do example non deductible B&amp;O, end user Sales tax or  impact fees... That Employees don't pay or often even know about, yet some of us small business owners are also employees, so we get double taxed... I see several interesting statement in your question.  A. my only income is from my Employer B. I also receive employer stock (ESPP, RSU, NSO). However, employer withholds taxes for these stock transactions through my broker (I see them broken down on my W2).  C. I have been subject to Alternative Minimum Tax. A implies a simple tax return. B and C tell the opposite story. In fact if B is not done correctly The amount withheld due to payroll may be perfect but the under withholding could be due to the ESPP's, RSUs and NSOs.  The AMT can throw everything else out the window.  If a person has a very simple tax situation: Income doesn't change a lot from paycheck to paycheck; they take the standard deduction; the number of exemptions equals the number of people in the family. Then the withholding is very close to perfect.  The role of the exemptions on the W-4 is to compensate for situations that go above the standard deduction. The role of extra withholding is when the situation requires more withholding due to situations that will bring in extra income or if the AMT is involved.