If I exercise underwater ISOs, can I claim a loss?
"No, because you didn't lose anything. When you exercise ISO ""at loss"" you're buying stock without a discount, that's it." If you do this, you own a stock worth $1, with a basis of $2. The loss doesn't get realized until the shares are sold. Of course, we hope you see the stock increase above that price, else, why do this?
There is a positive not being mentioned above: the depreciation vs your regular earned income. Disclaimer: I am not a tax attorney or an accountant, nor do I play one on the internet. I am however a landlord. With that important caveat out of the way: Rental properties (and improvements to them) depreciate in value on a well-defined schedule. You can claim that depreciation as a phantom loss to lower the amount of your taxable regular income. If you make a substantial amount of the latter, it can be a huge boon in the first few years you own the property. You can claim the depreciation as if the property were new. So take the advice of a random stranger on the internet to your accountant/attorney and see how much it helps you. I like C. Ross and MrChrister's advice to not be heavily weighted in one stock over the long run, especially the stock of your employer.  I'll add this: One thing you really ought to find out – and this is where your tax advisor is likely able to help – is whether your company's stock options plan use qualified incentive stock options (ISO) or non-qualified stock options (NQO or NSO).  See Wikipedia - Incentive stock option for details. From my understanding, only if your plan is a qualified (or statutory) ISO and you hold the shares for at least 1 year of the date of exercise and 2 years from the date of the option grant could your gain be considered a long-term capital gain. As opposed to: if your options are non-qualified, then your gain may be considered ordinary income no matter how long you wait – in which case there's no tax benefit to waiting to cash out. In terms of hedging the risk if you do choose to hold long, here are some ideas: Sell just enough stock at exercise (i.e. taking some tax hit up front) to at least recover your principal, so your original money is no longer at risk, or If your company has publicly listed options – which is unlikely, if they are very small – then you could purchase put options to insure against losses in your stock.  Try a symbol lookup at the CBOE. Note: Hedging with put options is an advanced strategy and I suggest you learn more and seek advice from a pro if you want to consider this route.  You'll also need to find out if there are restrictions on trading your employer's public stock or options – many companies have restrictions or black-out periods on employee trading, especially for people who have inside knowledge. I can't quite follow your question, so I'm proceeding under the following assumptions: - You paid £31,000 - Your partner paid £4,242 - You have at least one mortgage, which you both pay equally. If the relationship terminates, sell the property. You are reimbursed £31,000 and your partner is reimbursed £4,242. Any remaining proceeds from the sale are split 50-50. If the result is a net loss (i.e. you are underwater on your mortgage), you split the debt 50-50. If you are not both paying the same toward the mortgage, I'd split the profit or loss according to how much you each pay toward the mortgage. Of course, this is not the only possible way you can split things up. You can use pretty much any way you both think is fair. For example, maybe you should get more benefits from a profit because you contributed more up-front. The key thing, though, is that you must both agree in writing, in advance. This is reasonable; this is what I did, for example. Note that if the relationship ends, one or the other of you may wish to keep the property. I'd suggest including a clause in your written agreement simply disallowing this; specify criteria to force a sale. But I know lots of people are happy to allow this. They treat that situation as a forced sale from both people to one person. For example, if your partner chooses to stay in the house, he or she must buy the property from you at prevailing market rates. I ended up just trying. I gave A the IBAN of B's account, which I calculated online based on the bank code and account number (because B claimed IBAN won't work, so didn't give it to me), and B's name. A was able to transfer the money apparently without extra difficulties, and it appeared on B's account on the same day. Contrary to some other posts here, IBAN has nothing to do with the Euro zone, nor is it a European system. It started in Europe, but it has been adopted as an ISO standard (link). As usual of course some countries don't see the urgency to follow an international standard :) XE.com has a list of all IBAN countries; quite a few are non-European. Here is even the list formatted specially for the European-or-not discussion: link. "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." "There are different schools of thought. You can ask the IRS - and it would not surprise me if you got different answers on different phone calls. One interpretation is that a put is not ""substantially identical"" to the disposed stock, therefore no wash is triggered by that sale. However if that put is exercised, then you automatically purchase the security, and that is identical. As to whether the IRS (or your brokerage firm) recognizes the identical security when it falls out of an option, I can't say; but technically they could enforce it because the rule is based on 30 days and a ""substantially identical"" stock or security. In this interpretation (your investor) would probably at least want to stay out of the money in choosing a strike price, to avoid exercise; however, options are normally either held or sold, rather than be exercised, until at or very close to the expiration date (because time value is left on the table otherwise). So the key driver in this interpretation would be expiration date, which should be at least 31 days out from the stock sale; and it would be prudent to sell an out of the money put as well, in order to avoid the wash sale trigger. However there is also a more unfavorable opinion - see fairmark.com/capgain/wash/wsoption.htm where they hold that a ""deep in the money"" option is an immediate trigger (regardless of exercise). This article is sage, in that they say that the Treasury (IRS) may interpret an option transaction as a wash if it's ballpark to being exercisable. And, if the IRS throws paper, it always beats each of paper, rock and scissors :( A Schwab article (""A Primer on Wash Sales"") says, if the CUSIPs match, bang, wash. This is the one that they may interpret unfavorably on in any case, supporting Schwab's ""play it safe"" position: ""3. Acquire a contract or option to buy substantially identical stock or securities..."" . This certainly nails buying a call. As to selling a put, well, it is at least conceivable that an IRS official would call that a contract to buy! SO it's simply not a slam dunk; there are varying opinions that you might describe as ranging from ""hell no"" to ""only if blatant."" If you can get an ""official"" predetermination, or you like to go aggressive in your tax strategy, there's that; they may act adversely, so Caveat Taxfiler!" When you get into reading Revenue Rulings and Treasury Regulations - I'd suggest hiring a professional to do that for you. Especially since you also need to assure that the new stock does indeed qualify as QSBS. However, from the revenue ruling you quoted it doesn't sound like there's any other requirement other than reporting the subsequent purchase as a loss on your schedule D. I wouldn't know, however, if there are subsequent/superseding revenue rulings on the matter since 1998. Professional tax adviser (EA/CPA licensed in your State) would have the means and the ability to research this and give you a proper advice. Great question! It can be a confusing for sure -- but here's a great example I've adapted to your scenario: As a Day Trader, you buy 100 shares of LMNO at $100, then after a large drop the same day, you sell all 10 shares at $90 for a loss of $1,000. Later in the afternoon, you bought another 100 shares at $92 and resold them an hour later at $97 (a $500 profit), closing out your position for the day. The second trade had a profit of $500, so you had a net loss of $500 (the $1,000 loss plus the $500 profit).  Here’s how this works out tax-wise: The IRS first disallows the $1,000 loss and lets you show only a profit of $500 for the first trade (since it was a wash). But it lets you add the $1,000 loss to the basis of your replacement shares. So instead of spending $9,200 (100 shares times $92), for tax purposes, you spent $10,200 ($9,200 plus $1,000), which means that the second trade is what caused you to lose the $500 that you added back (100 x $97 = $9,700 minus the 100 x $102 = $10,200, netting $500 loss). On a net basis, you get to record your loss, it just gets recorded on the second trade. The basis addition lets you work off your wash-sale losses eventually, and in your case, on Day 3 you would recognize a $500 final net loss for tax purposes since you EXITED your position. Caveat: UNLESS you re-enter LMNO within 30 days later (at which point it would be another wash and the basis would shift again). Source: http://www.dummies.com/personal-finance/investing/day-trading/understand-the-irs-wash-sale-rule-when-day-trading/