Be ready to pay the taxes The premise underlying stock option value is that you will be able to buy the stock in the future at today’s lower price.And yes, when you actually buy the option or “exercise it”, you are liable for the taxes associated with the profit income..action_button.action_button:active.action_button:hover.action_button:focus.action_button:hover.action_button:focus .count.action_button:hover .count.action_button:focus .count:before.action_button:hover .count:before.u-margin-left--sm.u-flex.u-flex-auto.u-flex-none.bullet.What you need to determine is that a professional effort was made to correctly price the options.For a public company employee receiving options, this is much simpler because the pricing is determined by the closing price of the stock on the date of the option grant.Error Banner.fade_out.modal_overlay.modal_overlay .modal_wrapper.modal_overlay [email protected](max-width:630px)@media(max-width:630px).modal_overlay .modal_fixed_close.modal_overlay .modal_fixed_close:before.modal_overlay .modal_fixed_close:before.modal_overlay .modal_fixed_close:before.modal_overlay .modal_fixed_close:hover:before.
Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.Thus, an artificially low exercise price might alter the tax payments for both the company and the option recipient.Further, at-the-money options are considered performance-based compensation, and can therefore be deducted for tax purposes even if executives are paid in excess of $1 million (see Section 162(m) of the Internal Revenue Code).(In fact, it can be argued that if these conditions hold, there is little reason to backdating options, because the firm can simply grant in-the-money options instead.)David Yermack of NYU was the first researcher to document some peculiar stock price patterns around ESO grants.
In particular, he found that stock prices tend to increase shortly after the grants.
The company will also be liable for incorrect pricing.