[harryh]

This is not correct, and I'm not sure why you would think this. In general the way to think about capital gains is that you can't qualify for them unless you have purchased something that then appreciates in value.

So for stock options, you don't start the clock on the long term capital gains rate or set a cost basis for your capital gain until you exercise the option and shell out the cash for the strike price.

There is all kinds of information on the internet about this if you don't believe me.

[pianom4n]

I'm talking about incentive stock options (ISO), which is the most common thing to get. Non-statutory stock options (NSO) are entirely different and are not common for normal startup employees.

When you exercise ISOs, you are buying the stock at the strike price. It doesn't matter what the current market price of it is (other than for AMT). The cost basis is the strike price.

The "clock" for determine long-term vs short-term starts when you exercise, but it doesn't affect the cost basis. If you don't hold it long enough the gain may get taxed as short-term or ordinary income (usually no a difference except in a couple of states).