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I had stock options in a company which was recently sold to a private investment firm. As a result, my options were converted into a single large sum ( > $100,000) and delivered via wire transfer into my banking account.

This is a staggering amount of money for me. I have no debt outside my mortgage, so the plan was to just roll this in with the rest of my investments.

That said, I would be flabbergasted if there wasn't some tax thing I needed to do to account for this influx of cash. I did get an explanatory letter from the company's CFO which noted that the proceeds from the sale may qualify as long-term capital gains (I received the stock options > 2 years ago).

Feeling a little overwhelmed -- what next?

In this case you should consult an actual tax professional since that can be rather complicated.

In general

1. Tax treatment depends on whether (an how long) you did own actual stock at any point or if your options were directly converted to cash in a "same day sale".


2. Assuming it's a "Same day sale" than the profit (sell price - exercise price) is taxable as "ordinary income". Same as your paycheck.


3. You will need to pay "estimated taxes" this quarter to avoid a "underpayment penalty" next April


4. You still may get an underpayment penalty since this is likely to push you into a higher tax bracket which may raise your taxes for previous quarters as well.


5. You may want to adjust your withholding for the rest of the year to make sure you don't underpay in these quarters either.

You can certainly calculate all this yourself, but in this case, having a pro do it may easily save you more money then you need to pay for the service and you are on the safe side.

If you did own actual stock (not just options), things are significantly more complicated.

This is going to be considered income, so sock a portion of it away for taxes!

The question then is, "how much should you sock away?"

That depends on how long you've held the options.

• If less than a year, then it's short-term capital gains and so will be added to your income, so you'll be boosted into a higher bracket. Estimate what that will be based on your current income, and then put away that percentage of the $100K for taxes.


• If more than a year, then it's long-term cap gains. Thus, put away 20% for taxes.

These "put away estimates" might be too high (you might have put too much in a high yield savings account), but better too much than too little.

Another issue is that you might need to pay quarterly taxes on the windfall. I'll leave it to others to answer that.

That said, I would be flabbergasted if there wasn't some tax thing I needed to do to account for this

The stock option agreement you signed told you that taxes are your own responsibility. These transactions are just different than wage work even though your employer happens to be involved there is no withholding obligation from them.

Your CFO was correct, it MAY be long term capital gains, as in MIGHT. It MAY be income. It depends on the kind of contract (NSO, ISO, something non-standardized), and it depends on what you did when you received them like make an 83(b) election with the IRS or an 83(i) election with the IRS, or nothing. It depends on whether this transaction that was ultimately going to convey equity ownership for you was actually an OPTION or an EQUITY grant. If it was an equity grant it depends on if it was an RSU or RSA or something non-standardized or something else. In either scenario it depends on the share price of the conversion to cash payout.

When your CFO said it "may" be long term capital gains, its because it is the most favorable outcome tax wise and other employees in your company were on top of this strategically doing all of the aforementioned elections depending on their specific preferences and goals when they got their stock options. If you were one of those people, then it is just welcome news that the CFO reassured you of. Your CFO doesn't know exactly what you did or didn't do.