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Investment vs Tax Decisions with Stock Options (Dickey Peak, ID)

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Investment vs Tax Decisions with Stock Options

Location: Dicky Peak, Idaho Watch on YouTube

A View from Dickey Peak

Over across the way is Mount Borah, the highest peak in Idaho. I’m overlooking the Thousand Springs Valley on a not-so-clear day, and I’m currently on the side of Dickey Peak. I thought I’d hike all the way up, but instead, I’ve decided to go partway, sit in one of these goat beds, and do some breathwork.

A Tip for Your Stock Options

Today’s topic is about stock options—specifically, a tip to keep in mind:

Make sure you’re thinking about investment decisions just as much—or more—than tax decisions.

Often in discussions about stock options—whether non-qualified stock options or especially Incentive Stock Options (ISOs)—there’s a strong focus on the tax effect. And while ISOs are designed to help you save on taxes, that’s not the only factor you should be evaluating.

Tax Bracket Decisions

For instance:

  • With non-qualified stock options, you might decide whether to stay in the 24% tax bracket or exercise enough that you move into the 32% bracket.

  • You might wonder: Should I wait until next year to exercise and save on taxes?

The same questions arise with ISOs:

  • Should you exercise now?

  • Should you delay to get the long-term capital gains rate instead of the ordinary income tax rate?

  • Are you willing to pay Alternative Minimum Tax (AMT) in the process—essentially loaning money to the IRS?

Calculating the Tradeoff

Let’s look at a simple example:

  • Suppose you have a $100 stock, and your strike price is $50.

  • That’s a $50 gain per share, whether it's a non-qualified stock option or an ISO.

  • If it’s an ISO, and your long-term capital gain rate is 15%, and your ordinary income rate is 24%, that’s a 9% tax savings by waiting to sell.

That 9% difference applies only to the $50 gain, not the entire $100 stock value. So:

  • You’re saving $4.50 per share.

  • That’s the benefit of holding the stock another year and qualifying for long-term capital gains.

Meanwhile, you might need to pay AMT, effectively loaning that money to the IRS up front.

In the case of non-qualified stock options, maybe you’re looking at going from the 24% to 32% bracket—an 8% difference. Again, that’s applied to the $50 gain, not the full stock value.

Stock Volatility and Risk

Here’s the real question:

If the only reason you're holding the stock is to save on taxes, how much would the stock have to drop for you to lose that tax savings?

Answer: About $4.50. That’s a 4.5% change in stock price.

In today’s market, with a single stock, that kind of movement can happen on any given day.

The Takeaway

So it’s crucial not to base your decisions solely on taxes. Sometimes the dollar difference is more substantial, but sometimes the potential tax savings don’t justify the risk of holding the stock.

Whether you're considering to:

  • Hold the stock

  • Exercise and hold

  • Exercise and sell to lock in the value

…it’s a decision that should involve both investment analysis and tax planning.

Thanks.