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Lesson 10. Taxes and Your Options > Taxes and Nonqualified Stock Options - Pg. 48

Taxes and Your Options 48 Step Two: Selling the Stock For example, you sell the stock for $45 per share. You now owe tax on the $10 per share difference between the sale price ($45 per share) and your basis ($35 per share) or $10 per share. If you held the stock for one year and one day or more, the tax will be a long-term capital gain. If you held the stock for less than one year and one day, the tax is a short-term capital gain or the same as ordinary income tax. Since your objective is to exercise the options and sell the stock, there is little you can do in the way of tax planning to avoid the second taxable event. Caution Timing your transactions is one of the main ways you can influence the tax you pay on nonqualified stock options. Shifting Tax Liability There is one strategy that can put off and possibly lower your tax on the sale of the stock. It shifts the tax liability to another tax year, but only makes sense if you don't have access to the cashless transaction I discussed in Lesson 8 and the stock price is moving up. Here is how it might work. Your goal is to exercise your options and sell the stock sooner than the requirement for long-term capital gains. However, you want to minimize the ordinary income tax you must pay on the difference between your basis and the sale's price. You can exercise the options in one year and sell the stock in the next year. This has the effect of placing the two taxable events in separate tax years.