Question: Taxes on stock options?

When you exercise stock options (first make the purchase), you receive some profit from the market price minus the options price (options price is price you received options, and assuming market price is greater than options price). Are there any tax with-holdings on this profit for capital gains? Do you need to file tax returns to get some of this money back? I am in the US using etrade and fidelity.

Answer:

If you bought a call, then exercise the option, the call premium goes toward increasing the cost basis of your purchase.

If you bought a put, then exercise the option, you are selling the underlying shares ( that you own ), and the put cost increases your cost basis - it is added to the original purchase price of your stock.

If you decide to close out the position and not involve any buying/selling of underlying stock, then you would declare the loss/gain on the round trip as short term.

The above does not apply to ESOPs, RSOPs, private stock options and other special situations.

If you exercise a stock option you adjust your cost basis by the amount of the option. Either + or -. At least that is my understanding.

It's hard to know exactly what you mean here - if you mean employee stock options then your employer is required to withhold tax on the exercise although there are some esoteric ways to avoid that. If you are talking about non-employee stock options then there is no withholding, I believe, in any case although maybe if you are a non-resident alien there is (gotta look that up yourself). If there is wothholding, you need to file a return to get it back. Exercising options is definitely a taxable event and does not just adjust your basis as Muncie suggests.