This week Mark goes through what it means when equity compensation options are underwater. Underwater Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) have no intrinsic value. Because the strike price is more than the current market value, they show no value on your statement. Mark provides an example of an underwater option and what you should do about it. There is often little reason to pay more for a stock than it is worth. There is no tax deduction by exercising an underwater option. Many people mistakenly think that a paper “loss” on the exercise will offset the ordinary income tax on options that have value.
The only time exercising an underwater option may be appropriate is when it’s a privately held company. If the stock is not publicly traded, exercising the underwater, out-of-the-money option and paying more than it is worth may be the only way to access the stock, but it is a very BIG risk.
Lowering expectations, and being realistic about the value of your equity compensation, will help you make better financial decisions and more effectively build well-balanced wealth.
Each equity comp type has its own tax and risk profile. Make sure to consult a financial professional before acting.
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The Architecture of Wealth Podcast is for educational purposes only. Investment Advisory Services are offered through Sona Financial LLC (DBA Sona Wealth and Sona Wealth Management), a registered investment adviser authorized to do business in states where registered or otherwise exempt from registration. Nothing discussed during this show/episode should be viewed as investment advice. If you have questions pertaining to your specific situation, please consult your own financial professional.