:max_bytes(150000):strip_icc():format(jpeg)/GettyImages-2165010509-b8ada0b03d854c2e9672cbe6ec6dfcfa.jpg)
| Capital Gains Tax Rates and Thresholds (2025) | |||
|---|---|---|---|
| Â | 0%Â | 15%Â | 20% |
| Single | Up to $48,350 | $48,350-$533,400 | Greater than $533,400 |
| Married Filing Separately | Up to $48,350 | $48,350-$300,000 | Greater than $300,000 |
| Married Filing Jointly/Surviving Spouse | Up to $96,700 | $96,700-$600,050 | Greater than $600,050 |
| Head of Household | Up to $64,750 | $64,750-$566,700 | Greater than $566,700 |
Cashless Exercise
A cashless exercise occurs when any vested options are exercised at a predefined price or expiration without the exchange of physical cash. With a cashless exercise, there is no out-of-pocket cost. Instead, you use shares subject to exercising to cover your exercising costs.
The options under a cashless exercise are exercised and the shares are sold immediately. The net proceeds (market price less the cost of the option, transaction fees, and taxes) are deposited in your account several days later.
Cashless Hold
A cashless hold is when you exercise enough options to purchase the remaining shares without using additional cash. In this strategy, you simultaneously exercise and sell enough stock to cover the cost of exercising the options (and taxes). You receive the remaining shares and any fractional shares or partial shares will be paid in cash.
Strategies matter when it comes to managing tax consequences. Understand the different rules and tax issues about ISOs and NSOs before you make any decisions to exercise your options.
Underlying Stock Price
Setting up a plan to track the price of the underlying stock and systematically exercising vested options that are in the money (ITM) before expiration or at a set target price to capture the gain. If the stock price continues to increase, continue exercising additional options.
This is a situation where you do not want taxes to drive your decision. You may be better off exercising the options and moving the stock to a brokerage account where you can place stop orders to protect your gain if the stock’s price suddenly plunges. If the price of the stock plunges and the options are left unexercised, you would have had no gain.
Timing the Exercise
Timing the exercise of options to help manage taxes. Most companies withhold some taxes when options are exercised. However, that may not be enough to cover your full tax liability. If options are exercised in January, February, or March, the stock can be held for 12 months, allowing the shares to be sold and receive capital gains tax treatment, and then sold in the next calendar year to help cover any taxes due.
For example, exercise options in February 2024 and then sell the shares in March 2025. The 2024 taxes from the initial exercise are not due until April 2025. If you use this strategy, place stop orders in case the stock drops in price. Any gain will be taxed as ordinary income, but you will not have to come up with other funds to cover your tax obligation.
Stock Swaps
Consider a stock swap if your plan allows it. In this strategy, the option exercise is funded using company stock you already own. A stock swap is a tax-deferred exchange. You surrender enough shares of stock to equal the exercise price of the options you plan to exercise. The cost basis and holding period in the old shares carry over to the new shares. Any additional bargained element would be taxable income.
This avoids any tax liability on the unrealized appreciation in the old shares until the stock is ultimately sold. It also will provide the funds to exercise the options without having to tie up additional capital.
Significant Appreciation
Make an 83(b) election if you expect the company stock to significantly appreciate. In this strategy, you exercise the options before vesting. The bargain element is taxed as if the options were vested. Once the options vest and the holding period requirements are fulfilled, any gain is taxed at capital gain rates.
This can help avoid AMT if the election is made when the bargained element is small. Bear in mind that although the options are exercised, the owner has no control over them until they are fully vested. As such, there is a risk that the stock will not appreciate or drop.
Gift NSOs
Gift NSOs if the plan allows. The transfer is not considered a completed gift until the options vest. This means the donor is liable for any income taxes due on the bargained element.
This strategy allows you to remove the value of the options from your estate and transfer the future appreciation to others, possibly in a lower tax bracket.
Disqualifying Disposition
If you have already exercised ISOs and the price of the underlying stock drops, consider a disqualifying disposition. This disqualifies the ISOs from receiving favorable tax treatment—in essence turning them into NSOs. Options become disqualified after exercising by selling the stock before meeting holding period requirements.
In some cases, an intentional disqualifying disposition could be used if ISOs were exercised and then the price of the stock plunged before the shares were sold. The exercise would be taxed as ordinary income avoiding the AMT issue.
How Is an Option Exercised?
Options are exercised when you buy or sell the underlying asset instead of allowing the contract to expire worthless or closing the position. Options can be exercised manually (by informing your broker or administrator) before the expiration date or automatically when your options are going to expire in the money by your broker.
What Does In the Money Mean?
When an option is in the money, its market price is above (call option) or below (put option) the strike price. The market price is the price at which the underlying asset can be bought or sold at this point. The strike price, on the other hand, is the price at which the underlying asset can be purchased or sold at the time the option is exercised.
What Does It Mean to be Vested?
Vesting grants ownership to shares in a qualifying account. For example, if you have a 401(k) and your employer provides a match, you don’t get access to those shares until you reach the vesting or waiting period. Some employers require that you wait a number of years before the shares become yours. If you leave your company, you forfeit any unvested shares while any vested shares are transferred to your name.
The Bottom Line
Options are a great incentive and need to be managed. Depending on your financial situation, employing more than one strategy may be the best approach. And always consider portfolio diversification and reducing risk by not building a concentrated position (more than 5% of your investments) in one stock.