How Can I Accurately Calculate The Tax Basis Of A Non-qualified Stock Option (NSO) That Was Exercised And Then Subsequently Sold In A Partial Tender Offer, Where The Option Was Originally Granted With A 10-year Expiration Date But Was Modified To Accelerate The Vesting Period Due To A Change In Control Event, And The Taxpayer Is Subject To The Alternative Minimum Tax (AMT) In The Year Of Sale?
To accurately calculate the tax basis of a non-qualified stock option (NSO) that was exercised and subsequently sold in a partial tender offer, considering the alternative minimum tax (AMT), follow these organized steps:
1. Determine the Exercise Details:
- Strike Price: The price at which the NSO was exercised.
- Fair Market Value (FMV): The stock's value on the exercise date.
- Spread: The difference between FMV and strike price, recognized as ordinary income.
2. Calculate Tax Basis:
- Regular Tax Basis: Strike price + spread.
- AMT Basis: Strike price only, as the spread is a preference item added back for AMT purposes.
3. Consider the Sale:
- Sale Proceeds: The amount received from selling the stock.
- Holding Period: Determines if the gain is short-term (held ≤ 1 year) or long-term (held > 1 year).
4. Compute Gains:
- Regular Tax Gain: Sale proceeds - (strike price + spread).
- AMT Gain: Sale proceeds - strike price.
5. Address Partial Tender Offer:
- Allocate the basis and proceeds proportionally among the shares sold and retained, if necessary.
6. AMT Considerations:
- The spread is an AMT preference item, potentially increasing taxable income.
- The taxpayer must report gains under both regular and AMT rules, paying the higher tax amount.
7. Summary:
- Regular Tax Basis: Strike price + spread.
- AMT Basis: Strike price.
- The gain calculation varies between regular tax and AMT, with AMT potentially resulting in a larger gain due to the lower basis.
This structured approach ensures accurate calculation of the tax basis and consideration of AMT implications.