I have received some stock option grant which will vest over a period of 4 years, 25% will vest in one year, if I don't sell it after vesting, do I pay taxes (AMT) for the gains or do I pay AMT/Taxes only when I sell it.For e.g Strike price : $10, one year later $100. Do I pay taxes on $90 paper gain or only when I sell it.

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There are two main types of options. Find out if yours are ISO (qualified or statutory) or NQ (non-qualified or non-statutory).Either way, there are no taxes due until you exercise. If NQ, then you owe tax on the SPREAD (built-in gain a.k.a. fair market value (FMV) of the exercise price minus grant price) when you exercise it even if you don't sell the stock that year. The spread is compensatory income, meaning it will be ordinary income at the federal and state level, plus you will owe social security and Medicare taxes on it. When you sell, your basis will be the grant price plus the ordinary income you had to claim plus your commission you paid. It will be long-term capital gain (LTCG) if you sell more than one year after you exercise.If it is ISO, you will owe no taxes on the exercise date. When you sell the stock, if you wait at least a year from the exercise date and at least two years from the grant date (this is called a qualifying sale), the entire gain will be LTCG. If you don't wait that long, the spread will be ordinary income (not compensatory income) and the rest will be capital gain.AMT: If you exercise an ISO and don't sell by the end of the calendar year, the spread on the exercise date will be used to calculate your AMT. It does not necessarily mean you will owe AMT, but the larger this value is, the more likely you will have AMT. This type of AMT is refundable, so if you live long enough and if the amount is small enough, you will eventually get it all back.Most people exercise and sell the same day. If that is the case, you will have no AMT issues. If it is an NQ, all gains are compensatory. If it is an ISO, all gains are ordinary. It is that easy.Don't forget to include the sale on your Schedule D. The basis is the grant price times the number of shares sold plus all compensatory / ordinary income you had to claim those shares. For those of you that exercise and sell the same day, your basis will be your selling price. You still need to do Schedule D, but you will show no gain/loss. Actually, most people will show a small loss equal to the commission they had to pay to sell the shares.Examples:ISO:Grant 100 shares at $10/share on 1/1/05a) Exercise and sell on 12/1/05 at $22/share with $25 commissionrdinary income of 100 x ($22-$10) = $1200Schedule D STCG Basis=$2225 (ordinary income + grant price + commission) Sales Price = 100 x $22 = $2200 (will produce a ST loss of $25)b) Exercise on 12/1/05 with FMV=$22/share ; sell on 12/15/06 at $45/share with $25 commissionrdinary income of 100 x ($22-$10) = $1200 in '06 (not '05)(Why ordinary income? Even though you held for more than a year after exercise, you didn't wait 2 years from grant)Schedule D LTCG Basis = $2225 ; Sales Price = 100 x $45 = $4500Plus, when you do your '05 return, you will have to enter the spread $1200 on the "Exercise of incentive stock options (excess of AMT income over regular t ax income)" (line 13?) of your 2005 Form 6251 to see if you owe any AMT. Any AMT created due to ISO exercising will be credited to you and can be refunded in subsequent years if you fill out form 8801.If you wait until at least 1/2/07 to sell, the whole gain would have been LTCG. You still would have the AMT issue in '05 since you exercised in '05 and didn't sell in '05. NQ:Grant 100 shares at $10/share on 1/1/05a) Exercise and sell on 12/1/05 at $22/share with $25 commission:Compensatory income of 100 x ($22-$10) = $1200 (will be added to boxes 1, 3, 5, 16 on your ’05 W-2...look for it in box 12V…don’t add it again!)Schedule D STCG Basis=$2225 (compensatory income (box 12V of W-2) + grant price + commission) ; Sales Price = 100 x $22 = $2200 (will produce a ST loss of $25)b) Exercise on 12/1/05 with FMV=$22/share ; sell on 12/15/06 at $45/share with $25 commission:Compensatory income of 100 x ($22-$10) = $1200 in '05 (same as ‘a’)Schedule D LTCG Basis = $2225 ; Sales Price = 100 x $45 = $4500

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