Submitted by Theresa Oatman, Stock Connections Inc.

For the last year I’ve been giving seminars for Financial Planners and Tax Accountants on the tax reporting and withholding from various types of equity granted to employees. Silicon Valley prides itself on rewarding their employees with stock options and other means for employees to acquire company stock. But not everyone understands the tax implications. This is NOT a do-it-yourself project! Let me tell you why.

Recently I heard the story of an employee whose financial planner misunderstood the beginning of the holding period for long-term capital gains for Incentive Stock Options (ISO). He thought the holding period began when the option vests and advised his client to sell all the options that were vested for a year or more. Unfortunately, the holding period begins on the day the options are exercised and must be held for more than a year plus one day after that time.

This misinformation resulted in ordinary income of more than $300,000, and no taxes are withheld on ISO exercises or sales. Imagine having to write a diplomatic email to the employee explaining that the W-2 and broker’s 1099 were indeed correct and their financial planner was mistaken. I didn’t mention the financial planner, simply gave the employee a copy of the definition of ISOs from the company’s FAQs on the intranet.

Financial planners and tax accountants don’t need to be experts in this area, but they do need to know who to call on for expert advice.