TLDR
The IRS allows the avoidance of double taxation when selling or exchanging shares for the purpose of exercising NSOs.
The IRS allows the avoidance of double taxation when selling or exchanging shares for the purpose of exercising NSOs. As such, ESO clients with NSOs can sell a portion of their shares to ESO and use those proceeds to exercise the balance of their options for their own benefit. This type of transaction is also known as a sell to cover.
If your shares are attractive, then ESO will supply enough cash to exercise all of your NSOs including the mandatory withholding taxes. No tax is associated with the sale to ESO, but regular NSO taxes are paid for the exercise using ESO money including the shares exercised and immediately sold. This swap exercise method is often much more tax efficient than exercising on your own, selling separately, and then using what’s left to exercise more NSOs on your own.
For more information on how the ESO Fund can help you with taxes on your NSO exercise, please contact us. (scott@esofund.com)
