What to do with your stock options when the market is in the preverbal toilet? Nobody likes stock market declines. From 401ks to 529s, a bear market is hazardous to one’s wealth. However, there are five things that you can do to set yourself up for success when the stock market and the economy rebound.
1. Tax Loss Harvest
Remember when Tesla stock was skyrocketing and you bought shares at the peak? Don’t let the tax benefits go to waste. If you sell that stock now for a loss, then wait for 30 days to buy back, you can use that loss to offset gains from other areas. If you have Incentive Stock Options (ISOs) that you’ve held for one year since purchase and two years since grant date, you can offset those gains with the losses that you’ve created.
2. Exercise ISOs Now – Public Companies
If you are at a publicly traded company and you’re still holding on to unexercised ISO’s, now might be a good time to exercise them. Many times, people don’t exercise their options because of the alternative minimum tax (AMT) consequences. If the stock is trading at 30% less than before, you can exercise now and have a much smaller AMT hit. If you hold the stocks for a year, you’ll get full capital gain treatment on the gain.
3. Exercise NSOs Now – Public Companies
Have you ever wanted to change wages to capital gains? If you exercise your Non-Qualified Stock Options (NSOs) at a discount and hold them for a year, this is essentially what you are doing, assuming the stock price recovers. However, NSOs can be a bit trickier because when you exercise an NSO, the difference in what you pay and the fair market value is included in your wages. This means you have to come up with the cash to purchase the option and the tax if you want to buy and hold.
4. Wait to Exercise Options – Pre-IPO Companies
Since there is no ready market to establish the price on a pre-IPO option, companies often rely on their 409A valuations to establish the fair market value of the stock. What if your company’s 409A just came out in January 2020? It’s likely that your stock is overvalued for purposes of exercising your options, and it doesn’t make sense to pay extra tax. It’s possible that the company can adjust the 409A valuation, so check with your HR department before making any assumptions. If the new 409A is coming out soon, it’s likely the valuation will be lower than normal, and it may make sense to wait for the valuation to come out.
5. Think Charitably
If the saying “doing well by doing right” speaks to you, then this could be a great time to make an impact. Applicable federal rates (AFRs) are extremely low right now, which means the charitable lead trust (CLT) could be a great opportunity.
In a CLT, a person puts cash or stock in a trust and the charity receives the income for a period of years. After those term of years, the money goes back to the grantor or a different beneficiary. If the grantor is going to be the recipient, they will also receive a tax deduction for the income gift. The amount that’s deducted is determined actuarially and will be based, in large part, on the presumed rate of the rate. The lower the presumed rate of the return, the more it is assumed will go to charity. The more assumed charitable benefit, the higher the deduction.
The AFR establishes the presumed rate of return. If a person purchases their NSOs and puts it in a CLT, they’ll either wait for the stock to go back up, diversify a portfolio that should be able to beat the rate of return, or get a massive tax deduction up-front, all while helping their favorite charities in their greatest time of need. Layer on top a tax loss harvesting strategy, and the benefit gets even bigger.
Navigating the rules and knowing how to position assets is best done with a partner who knows how to work the tax and stock option planning in the right ways. At WRP Wealth and WRP Tax, we work with our clients to create an optimized plan so our clients get to keep more of their hard-earned wealth and meet their financial goals. For more information, watch our video interview where we discuss the topic in depth.