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I bought the options I had vested in the Company upon leaving (United States). After several years the Company was bought/merged into another, and my stock was paid out.

From my understanding:

  1. The profits from this sell event are: {payout amount} - {purchase price} = {profit}
  2. I am required to pay the IRS long-term capital gains tax, calculated by: {profit} * {15%} (my tax bracket falls in the "standard" range, the profits from this event wouldn't push me to the 20% threshold)
  3. There are no additional tax implications of this event. Since the sell is considered long-term capital gains, this profit amount does not increase my taxable "income".

[Q1] Is all of the above correct? Most-specifically I just want to know if I will be "double-taxed" (long-term capital gains + increased AGI that is taxed at my income tax bracket) or if this long-term capital gain will potentially raise me to a higher income tax bracket.

This leads to my most pressing questions, concerning when I am required to pay taxes on this amount. My understanding of tax payment for this event is that taxes are due at the time of monetary gain. In order to pay my long-term capital gains tax I must either (a) repay using estimated taxes or (b) using withholdings from my paycheck, but there also seems to be a third option (c) of some "safe harbor" clause where if my current tax year withholdings are >= 110% of my last year's taxes I won't have to pay any penalty at the end of the year if I don't pay taxes on this gain right now, and wait until I file taxes to pay it.

[Q2] Can I pay my estimated long-term capital gains in one lump-sum right now? Is that the suggested move?

[Q3] If I chose to use Estimated Taxes to repay this tax, and the date of sale was between the first and second quarters (estimated taxes are generally repayed quarterly), do I split this estimated tax into 3 payments by the due date of each quarter? Or is the full amount due by the next quarter (6/15)?

[Q4] Can I use the "Safe Harbor" payment rule to repay 110% of last year's tax instead in order to delay repayment and invest this amount in the interim? It was unclear if this rule only applied to income or if it extended to capital gains. If so, should I make some payment now to ensure I hit that 110% amount?

[Q5] Additionally, is Net Investment Income Tax (NIIT) or anything else in play here? I tried looking into NIIT and the IRS pages just confused me more.

Thanks so much in advance!

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  • You seem to think that "capital gains" and "income" are not related. Capital gains are income.
    – littleadv
    Jun 2, 2022 at 20:20
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    Go to a good CPA, pay $500 for a 1-hour consultation and ask the above questions. You should still research it yourself, but be sure to get professional advice.
    – osa
    Jun 2, 2022 at 20:57
  • Care to elaborate just a little more?
    – hightech
    Jun 5, 2022 at 0:35
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    All capital gains (long-term and short-term) are included in the AGI and in the taxable income. However, when calculating the income tax, the worksheet calculates the tax on the long-term capital gains slightly differently. Nevertheless, it is still part of the income tax. The same rules on penalty for underpayment of the tax (including rules on payment required each quarter) applies no matter if part of the income was from capital gains or not.
    – user102008
    Jun 5, 2022 at 7:38

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If you have confidence in your abilities, just follow the instructions for figuring your estimated tax in Form 1040-ES.

How To Figure Your Estimated Tax

You will need:

  • The 2022 Estimated Tax Worksheet,
  • The Instructions for the 2022 Estimated Tax Worksheet,
  • The 2022 Tax Rate Schedules, and
  • Your 2021 tax return and instructions to use as a guide ...
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