News & INSIGHTS

Tax-Smart Wealth Building: Don’t forget the reason why you originally bought your ISO.   

While Incentive Stock Options (ISOs) have favorable tax treatment compared to other types of stock awards, it’s crucial to understand the financial implications of managing ISOs, particularly when considering the long-term strategy of holding and eventually selling that can lead to more favorable tax implications. Often, we see clients hesitant to execute the final step of this strategy: selling the stock after holding for the necessary period. Let’s explore why sticking to the original plan is essential and why letting go at the right moment is integral to your financial journey. 

Understanding the Strategy: 

When you exercise your ISOs, the common advice is to hold the stock for over a year. This strategy is not arbitrary. It’s a calculated approach to benefit from the long-term capital gains tax rate, which can be significantly lower than the short-term rate that applies if you sell your stock before the one-year mark. This difference in percentages can mean substantial savings on the taxes you owe, maximizing your profit from the sale of your ISOs. 

The Psychological Hurdle: 

Despite planning, when the moment to sell arrives, many hesitate. Seeing how much you could gain can often make the corresponding tax bill seem daunting. Here the psychological barrier emerges, a common phenomenon rooted in the fear of loss (in this case, the money that will be owed come tax time). However, it’s crucial to remember that paying taxes on gains means you are realizing those gains. The taxes owed reflect success in investment growth – you are in a favorable position.   

Remember How and Why We Got Here: 

It is critical to remember why you employed the “hold for one-year strategy” at the outset. On a percentage basis (and most likely on an absolute basis as well), you are paying a much lower amount in taxes than you would have by cashing out the ISOs at exercise one year earlier.  Don’t forget what the mission was from the start and execute the plan. 

It’s natural to hesitate before a significant financial decision, but remember, strategic financial planning, especially with ISOs, is a marathon, not a sprint. While the tax bill on your long-term gains might feel overwhelming, it represents a positive financial step forward. Stick to your guns – and your strategy. By doing so, you honor your financial plan and make the conscious decision to secure and protect your financial future and goals. If you find yourself second-guessing, this is the moment to lean on your financial advisor. It’s our role to help navigate these complex scenarios and provide the guidance needed to make informed and beneficial decisions. 

This is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product or services. The content is provided solely for your personal use and shall not be deemed to provide access to any particular transaction or investment opportunity. Amplius Wealth Advisors, LLC does not intend the information to be investment advice, and the information should not be relied upon to make an investment decision. Any third-party information contained herein was prepared by sources deemed to be reliable but is not guaranteed.