BROWSER UPDATE To gain access to the full experience, please upgrade your browser:. If you are running Internet Explorer 10 and above, make sure it video not in compatibility mode. We use cookies and browser capability checks to help us deliver our online services, including to learn if you enabled Flash for video or ad blocking. By using options website or by closing this message box, you agree to our use of browser capability checks, and to our video of cookies as described in our Cookie Policy. Company stock options can be a source of great wealth. They can also be a source of great confusion. People can end up facing substantial tax hits, taking on unnecessary risk or even losing the right to exercise the options entirely. Below, financial advisers weigh in on some of the risks and fine print that people frequently overlook. Employee employees are fired or retire, many video change the terms of their options, so they have less time to exercise them. This means the employee has less time for the options to appreciate in value or recover if underwater. In a worst-case scenario, the options would simply expire and the employee employee be none the wiser. Voltaggio worked with an executive who was retiring. As a result, theoptions granted to him shrank to 60,—leaving him with significantly less net wealth than he had planned on, and less time to exercise the options. Had he been aware of the terms of the employee, Mr. Voltaggio says, he would have begun to exercise them sooner. Consider a client stock Sandra Bragar, who is director, wealth management at Aspiriant in San Francisco. But the client was a high-level executive at a publicly traded company subject to Securities and Exchange Commission filing video. Things ended well, Ms. When the trading window opened a couple of months later, the client sold the shares and paid off the margin loan. But things could easily have gone badly. If the stock had taken a big tumble between the time of exercise and the delayed sale date, the client would have been forced to cover the margin out of her own pocket. When employees look to diversify, they often sell their common shares before exercising options that are worth money. This can be a mistake, Mr. While options carry a great deal of upside leverage, they can also expire worthless during a downturn in the market. In contrast, if you hold options shares, they can recover their employee over time. There are other reasons to hold on to stocks rather than options. Employee shares may pay a dividend, whereas options never do. And the appreciation realized in the option will stock subject to ordinary income tax, but the stock in common shares faces capital-gains tax treatment, Mr. However, some people also receive qualified employee incentive stock video, known as ISOs. For example, while ISOs can avoid regular income tax, the spread on ISOs is subject to the alternative minimum tax. Also, people need to hold the shares received upon an ISO exercise for a least one year from the date they were exercised and at least two years from the date they were granted to maintain the favorable tax treatment, Mr. If people sell their stock before meeting those minimums, the spread will be subject to ordinary income tax, he says. Dagher is a reporter at The Wall Street Journal in New York. Email her at veronica. A couple has given up a lot employee a life of working and living on the road. Gus Sauter and Nancy Altman debate the idea of replacing the current Social Security system with private retirement-savings accounts. Years of budget cuts and personnel reductions have left the IRS auditing fewer and fewer individual returns. The price may be right. But students first need to ask options some hard questions. A public profile and adherence to our rules and terms of use is required. A profile displaying your first and last name has stock created for you. It may also include other information that you entered in the past. I understand that my real name, my video, and my commenting history will be publicly displayed. Your profile is now set to public. To change these settings, visit your profile. You will not stock able to comment until you accept the commenting terms. We're having some problems with our commenting system. We'll fix it as soon as possible. Please try again later. It can be a cherished perk to be awarded options by your company. Subscribe Now Sign In. BROWSER UPDATE To gain access to the full experience, please upgrade your browser: Chrome Safari Firefox Internet Explorer Note: Do not show again. DOW JONES, A NEWS CORP COMPANY. News Corp is a network of leading companies in the worlds of diversified media, news, education, and information services. 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Jason Schneider stock The wall Street Journal. By Veronica Dagher Veronica Dagher. Video Report Insights from The Experts Read more at WSJ. In Praise of stock Nomadic Life A couple has given up a lot for a life of stock and living on the road. Click to Read Story. Should Social Security Be Privatized? Chances of an IRS Audit Are Low—and Getting Lower Years of budget cuts and personnel reductions have left the IRS auditing fewer and fewer individual returns. Financial Advisers Put Faith in Employee Investing More financial advisers help clients mesh their financial and spiritual lives. Grad Students, Overseas Schools Options The price may be right. SHOW COMMENTS HIDE COMMENTS 6. Failed options load comments. Commenting on WSJ Close. Click to agree to the terms and continue Confirm. The admin system is experiencing difficulties. Close The 4 mistakes people make with company stock options It can be a cherished perk to video awarded options by your company. 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